Homegrown company is a chain of grocery stores that are similar to indoor farmers market providing fresh local produce meats and dairy products to consumers in urban areas. Homegrown is considering opening several stores in a new city and has a proposals from three contractors (alpha, beta and gamma companies) who would like to provide buildings for the new stores. The amount of expected revenue from the stores will depend on the design of the contractor. For example, if home grown decides on a more open floor plan, with less shelf space for products revenue would be lower overall. However, if homegrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.
As the project manager for homegrown you are responsible for deciding which if any of the proposals to accept. Homegrowns minimum acceptable rate of return is 20%. You receive the following data from the three contractors.
Alpha, very open like an indoor farmers market, investment if selected 1472000
Beta, standard grocery shelving and layout, minimal aisle space, investment if selected 5678900
Gamma, mix of open areas and shelving areas, investment if selected 2525960
You have calculated estimates of annual cash flows and average annual income from customers for each of the three contractors plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis.
Alpha, estimated average annual income 313094, estimated average annual cash flow 351145
Beta, estimated average annual income 272019, estimated average annual cash flow 461411
Gamma, estimated average annual income 620249, estimated average annual cash flow 717120
What is the average investment for alpha, beta and gamma?
What is the average rate of return for alpha, beta and gamma?