A large portion of today's class was spent on the Costco case. The case presentation and case analysis (Excel file links) are below:
Case: https://pages.stern.nyu.edu/~adamodar...
Presentation: https://pages.stern.nyu.edu/~adamodar...
Excel file: https://pages.stern.nyu.edu/~adamodar...
While we did spend time on the details of the case, here were some general lessons that I hope you take away:
1. When a project creates cash flows in different businesses with different risks, the discount rates used have to reflect those differential risks. I kept the cash flows separate for the Clinic and retail and used different costs of capital for each one.
2. When a project uses up a resource, you have to factor that cost in, but you have to do so by looking at what will happen if you do not take the project as well. In the context of capacity, the clinic project will lead to capacity being used up earlier (in year 4) rather than later (in year 11). It is the difference in the present values of these costs that should be considered, not just the cost of investing in year 4.
3. When you decide to alter a project from finite life to a longer life, you have to behave differently in how you manage the project from the very beginning. In short, lengthening a project life is a trade off, where you settle for lower cash flows over the project life, in return for a higher ending value. In Costco Clinic terms, this will show up as more capital maintenance expenditures with the longer life than with the finite life. After the case, we looked at side costs and side benefits from projects, and how it is critical that we go beyond the hand waving (it is strategic, or good things will happened) to trying to make our best estimates of these costs and benefits and bringing them into the analysis.
Slides: https://pages.stern.nyu.edu/~adamodar...
Post class test: https://pages.stern.nyu.edu/~adamodar...
Post class test solution: https://pages.stern.nyu.edu/~adamodar...