Case Spreadsheet: The Local Cafe
The process of computing future value is called compounding. The formula for computing future value is:
Future value = Present value × (1 + r)twhere r is the return per period and t is the number of time periods. For example, a real estate mutual fund provides an estimated return of 10 percent per year. An investor starts with $100,000. The future value of her investment will be:
After one year, Future value1 = $100, XXXXXXXXXX = $110,000After two years, Future value2 = $100, XXXXXXXXXX = $121,000After three years, Future value3 = $100, XXXXXXXXXX = $133,100The future value formula takes into account compounding, i.e. the investor’s ability to earn interest on interest.The simple fixer-upper investment illustrates several common themes in project analysis. The start-up costs of a project are usually relatively straightforward to estimate. A fair amount of research is needed but the information is generally available. The size and timing of future cash flows, including estimated revenues and production costs, are harder to predict. Figure 9.1 shows the cash flows of the foreclosure fixer-upper, assuming that it will take you one year to do the remodeling and another year to sell the property.
Prepare a spreadsheet model for the case. Be sure to separate assumptions from the rest of the model and include scenario summary.
Here is a template to help you get started: