FINM2400 Assignment 2 ( Individual) This assignment is to be completed in groups of up to 5 people. The assignment is due on the 22nd of May 2020 at 2pm​. You should submit a pdf file with your...

FINM2400
Assignment 2
Student Name
Student ID
Name of the University
Email
Table of Contents
Question 1
Question 2
Question 3
References
Question 1
A.
Free cash flow for this project for 20 years
B.
NPV= $4,119,701
IRR= 10.03%
Payback Period= 8.57years
ABC Company should go ahead with this project as the NPV of the project is positive $4,119,701, IRR of 10.03% is greater than the cost of capital of 8% and payback period of 8.57 years is less than the operational period of 20 years.
C. We are using the Solver function in Excel to calculate the required
eakeven points for cost of capital, yearly revenue and labour cost by setting the target cell NPV to zero.
Breakeven point for cost of capital
The
eakeven point for cost of capital is 10.03%. It is worthwhile to note here that it is also the IRR of the project as IRR is the discount rate at which the NPV of the project becomes zero.
Breakeven point for yearly revenue
The
eakeven point for the yearly revenue is $4,400,570. It is worthwhile to note here that the IRR becomes 8% which is the discount rate used and the subsequent NPV becomes 0.
Breakeven point for labour cost
The
eakeven point for the labour cost is $1,034,429. It is worthwhile to note here that the IRR becomes 8% which is the discount rate used and the subsequent NPV becomes 0.
Question 2
A. Project Appraisal under recession
NPV= -$5,136,472
IRR= 7.04%
Payback Period= 10.8 years
ABC Company should not go ahead with this project if the economy goes into a recession as the NPV of the project is negative $5,136,472, IRR of 7.04% is less than the cost of capital of 10%. Though the payback period of 10.8 years is less than the operational period of 20 years, payback period is not an efficient indicator of financial viability of a project. Limitations of the payback period method are it is just a short-term outlook and totally overlooks the risks that might impact the cash flow and also does not consider time value of money. The management may also fail to consider significant amounts of cash flow after payback as this method only concerns till the payback period.
Question 3
Overview
In 2010, Adam Neumann and Miguel McKelvey established WeWork in New York with the aim to provide spaces facilitating coworking among entrepreneurs, freelancers, startup companies and even bigger companies. Since then, WeWork has expanded with a rapid pace to being one of the largest and most popular coworking chains in the globe with more than 5,000 employees working in almost 600 offices across 32 countries. The company’s valuation skyrocketed to $47 billion before its much hyped IPO in early 2019. But then the IPO was shelved and the valuation soared down to $8 billion.
Business Model
The way WeWork makes money is that it rents properties from their owners at a certain price and then offers those properties on rent at higher prices to clients. WeWork uses location based pricing i.e. it buys and rents properties depending on which location they are in for example, a property in New York will be more expensive to buy than in Minneapolis. This pricing strategy ensures that WeWork keeps overhead costs under control. WeWork also renovates the building by adding features such as technology equipped offices, cafes and community spaces. All these additions enable WeWork to quote a higher rent to their clients. Apart from this, WeWork also earns revenue by providing fee-based additional services from partnerships with other businesses such as car rentals. WeWork also offers a suite of services aimed at higher retention which attracts valuable third-party partners who can utilize our platform to reach our large member base.
Key Numbers and faulty metrics
In 2018, while its revenues grew 105% on a YoY basis to $1.82 billion, its losses also grew proportionately to $1.9 billion or 107% higher on a YoY basis. Neumann has often compared WeWork with Uber or Ai
nb. But realistically, WeWork is not light in terms of assets, unlike Uber and Ai
nb. WeWork had $15 billion worth of leases as assets and $18 billion worth of rental obligations as liabilities. On top of it, WeWork owned $7 billion of physical assets. Uber works with drivers who are independent contractors Ai
nb does not own any of their rental properties. Unlike Uber and Ai
nb, WeWork also has significant corporate overhead costs associated with full-time employees.
WeWork mentions Contribution Margin as one of the key performance indicators but it designs its own calculation methodology to determine its value. Lease expense for a specific location is the largest expense that WeWork incurs along with upfront rent concessions. But WeWork decides to back out these costs instead of amortizing them so the actual lease expense on a cash basis will be higher once the positive impact of the concessions is burnt out. WeWork also omits other expenses like corporate G&A, FF&E. Even though, the company reports its contribution margin to be 25% for the 6-month period ended June 30, 2019. If all these costs are added back, a more realistic contribution margin will be -40%.
In reality WeWork was losing a lot of money. Even in 2017, WeWork had lost $883m, despite having some $886m in revenue. WeWork’s projection of its market size for shared office space to the order of $3 trillion was over optimistic as in US it was counting anyone who worked at a desk in an American city where there was a WeWork as a potential “member” and in outside US, WeWork considered anyone with an office job to be a “member”. Moreover, WeWork had started getting into revenue-sharing contracts with property owners where some upfront improvement costs will be incu
ed by the owners, thereby reducing WeWork’s near-term losses. But these would definitely eat into long-term revenue projections and actual revenue streams.
Investors
The list of investors for WeWork include a number of global corporations, including holding conglomerate SoftBank, private equity firm Hony Capital, and real estate developer Greenland Holdings. In August 2017, SoftBank and its founder, Masayoshi Son, poured a massive $4.4 billion investment into WeWork through Saudi-backed Vision Fund. In August 2018, SoftBank invested $1 billion more. Till date, SoftBank has invested more than $15 billion. Apart from its Asian investors, Western companies like Goldman Sachs, J.P. Morgan and T. Rowe Price have also invested in the Manhattan-based WeWork.
There was a pushback from Vision Fund in December 2018 as a result of which a committed investment of $16 billion was reduced to $2 billion Vision Fund was sceptical about the excessively high valuation of $47 billion along with some aspects of real estate. This gave birth to the need of raising further equity financing through IPO.
Prevailing Culture
In the meantime, the culture prevailing within the company was also
ought under the scanner. There were several cases of sexual harassment and assault reported, but not acted upon. According to several employee sources, this culture begins at the top and trickles down to the bottom. Senior personnel and executives in a position of power forced junior employees to attend after-office events and promised incentives on active participation. Neumann was known for his eccentric and carefree lifestyle and made unrealistic commitments like donating $1 billion in to charity and pledging $20 million for conservation of rain forests under the confidence of revenue which WeWork had not yet earned.
Preparation for IPO and subsequent events
After being valued at $47 billion with Softbank being the largest investor, the company re
anded from WeWork to “The We Company” early in 2019. According to reports, the decision was made to help the firm grow and reach a wider audience. In...