Cheverly Paper Company
In response to increasing competition, a major paper distributor in the Washington, DC metropolitan area with headquarters in Cheverly, Maryland wants to expand its presence along the east coast. The objective is to have one warehouse facility in a major metropolitan area in Virginia, North Carolina, South Carolina and Georgia. The company has two potential strategies for this growth. In the first strategy, the company will start by establishing a warehouse facility in Richmond, Virginia with plans to move into the Raleigh-Durham area of North Carolina and then move into South Carolina and Georgia in about two to three year intervals. The second is to move into Atlanta, Georgia area right away and then move up the east coast establishing facilities in South Carolina, then in North Carolina and finally in Virginia.
The cost of establishing a warehouse facility in Richmond would be $500,000. The company must pay almost all of these costs before operations can begin. The net cash inflows for the first year of operations can be expected to be either $200,000 or $100,000. In other words there are two possible net cash inflows for the first year of operations. In the second year it is expected that the net cash inflows will increase by either 25% or 10%. For example, if the net cash inflow in the first year was $200,000, the net cash inflow for the second year would be either $250,000 or $220,000. If the next cash inflow for the first year was $100,000, the net cash inflow for year two would be either $125,000 or $110,000. In other words there are four possible net cash inflows for year two. The third year’s net cash inflows will increase by either 30% or 8% over the net cash inflows for year two. The initial investment and annual cash flow projections for locations in North Carolina and South Carolina are considered to be consistent with those for the Richmond facility and are not expected to change much over the next two to three years. The cost of a warehouse in Atlanta, Georgia would be $750,000. Again, the company must pay almost all of these costs before operations can begin. If the company acted now, the net cash inflows for the first year are expected to be either $400,000 or $150,000. For the next three years the net cash inflows are expected to increase by either 35% or 15%. If the company waits two or more years, the initial year net cash inflows in Atlanta would be only about $200,000 with annual increases of either 25% or 15%.
Discuss which strategy you would recommend to the company. Your recommendation should adequately address the risks associated with this expansion.
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