Appendix for Strategic Alliance with Jibbs

Plan 1
1) Zubinos's 2 year trial forecast NPV
NPV/Year 0 1 2
£ £ £
Profit before rental 2,250,000 2,500,000
Less: Rental £50,000 per store (1,000,000) (1,000,000)
Post-tax operating cash flows 1,250,000 1,500,000
Capital expenditure inccured (3,600,000)
Sales proceeds of capial expenditure 1,800,000
Net post-tax operating cash flows (3,600,000) 1,250,000 3,300,000
Discount factor 14% 1.000 0.877 0.769
Present Value (3,600,000) 1,096,250 2,537,700
NPV 33,950

𝑨𝒃𝒔𝒐𝒍𝒖𝒕𝒆 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝑵𝑪𝑭 𝒊𝒏 𝒕𝒉𝒂𝒕 𝒚𝒆𝒂𝒓

𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝒑𝒆𝒓𝒊𝒐𝒅 = 𝑳𝒂𝒔𝒕 𝒚𝒆𝒂𝒓 𝒘𝒊𝒕𝒉 𝒂 𝒏𝒆𝒈𝒂𝒕𝒊𝒗𝒆 𝑵𝑪𝑭 +
𝑻𝒐𝒕𝒂𝒍 𝒄𝒂𝒔𝒉 𝒇𝒍𝒐𝒘 𝒊𝒏 𝒕𝒉𝒆 𝒇𝒐𝒍𝒍𝒐𝒘𝒊𝒏𝒈 𝒚𝒆𝒂𝒓

[𝟑𝟔𝟎𝟎, 𝟎𝟎𝟎 − (𝟏, 𝟐𝟓𝟎, 𝟎𝟎𝟎 + 𝟑, 𝟑𝟎𝟎, 𝟎𝟎𝟎)]

𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝒑𝒆𝒓𝒊𝒐𝒅 = 𝟐 +
(𝟏, 𝟐𝟓𝟎, 𝟎𝟎𝟎 + 𝟑, 𝟑𝟎𝟎, 𝟎𝟎𝟎)
=1.8 years

[𝟑𝟔𝟎𝟎, 𝟎𝟎𝟎 − (𝟏, 𝟎𝟗𝟔, 𝟐𝟓𝟎 + 𝟐, 𝟓𝟑𝟕, 𝟕𝟎𝟎)]

𝑫𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒆𝒅 𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝒑𝒆𝒓𝒊𝒐𝒅 = 𝟐 +
(𝟏, 𝟎𝟗𝟔, 𝟐𝟓𝟎 + 𝟐, 𝟓𝟑𝟕, 𝟕𝟎𝟎)
=2 years

 Based on the above calculation, the payback period is 1.8 years and discounted payback period extend to 2
years. As a result the payback period is short as the assets have dispose at the end of year 2 which give a
biased view on the plan in the real performance.

Plan 2

2) If Jibbs extend the two year trial

NPV/Year 0 1 2 3 4
£ £ £ £ £
Profit before rental 2,250,000 2,500,000 2,775,000 2,853,750
¤ Less: Rental £50,000 per store (1,000,000) (1,000,000) (1,200,000) (1,200,000)
* Post-tax operating cash flows 1,250,000 1,500,000 1,575,000 1,653,750
Capital expenditure inccured (3,600,000)
Less: Jibss' contribution
Sales proceeds of capial expenditure
Net post-tax operating cash flows (3,600,000) 1,250,000 1,500,000 3,150,000 3,307,500
Discount factor 14% 1.000 0.877 0.769 0.675 0.592
Present Value (3,600,000) 1,096,250 1,153,500 2,126,250 1,958,040
NPV 2,734,040
¤ assume increase 20% of rental from Year
ear33&4
onwards
* assume increase 5% of every year from Year 3 onwards

[𝟑𝟔𝟎𝟎, 𝟎𝟎𝟎 − (𝟏, 𝟐𝟓𝟎, 𝟎𝟎𝟎 + 𝟏, 𝟓𝟎𝟎, 𝟎𝟎𝟎 + 𝟑, 𝟏𝟓𝟎, 𝟎𝟎𝟎)]

𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝒑𝒆𝒓𝒊𝒐𝒅 = 𝟑 +
(𝟏, 𝟐𝟓𝟎, 𝟎𝟎𝟎 + 𝟏, 𝟓𝟎𝟎, 𝟎𝟎𝟎 + 𝟑, 𝟏𝟓𝟎, 𝟎𝟎𝟎)
=2.6 years
 [𝟑, 𝟔𝟎𝟎, 𝟎𝟎𝟎 − (𝟏, 𝟎𝟗𝟔, 𝟐𝟓𝟎 + 𝟏, 𝟏𝟓𝟑, 𝟓𝟎𝟎 + 𝟐, 𝟏𝟐𝟔, 𝟐𝟓𝟎)]
𝑫𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒆𝒅 𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝒑𝒆𝒓𝒊𝒐𝒅 = 𝟑 +
(𝟏, 𝟎𝟗𝟔, 𝟐𝟓𝟎 + 𝟏, 𝟏𝟓𝟑, 𝟓𝟎𝟎 + 𝟐, 𝟏𝟐𝟔, 𝟐𝟓𝟎)
=2.8 years

Forecast of increasing annual profits of £100,000 and increase in annual rental by 20% as per UK exit in
European Union starting on Year 3. The payback period is 2.6 years whereas the discounted payback period
is 2.8 years. Assume that Zubinos is allow to continue operate it stores after Year 4 without dispose the
value of assets, if Jibbs performance is seen to improve due to its strong advertisement and reorganization.
To calculate the different project periods by using the Equivalent Advertisement Cost (EAC) of Plan 1 is
£33,950/1.647=£20,613, while Plan 2 is £2,734,040/2.914=£938,243. Hence, Plan 2 is more appropriate as
it generate a better return in the view of longer payback period.