UV8448 Feb. 3, 2022 Carly’s Car Clinic Sharing a large green curry dish, Carly and Myron Helvey were enjoying a window table in mid-November at their favorite Indian restaurant, the Jasmin Palace. The couple’s conversation migrated from concerns about their teenage twins, speculation on the weekend’s football outcomes, and then invariably back to their family business. The Helveys were finishing their 10th year owning and operating Helvey & Company, a tax accounting practice in central Kentucky. The business had done well and the couple was proud of what they had accomplished. Last month they had accepted an offer from a practice in a neighboring city to purchase Helvey & Company for $1 million. Receiving $1 million in cash had been an arresting surprise, and it had prompted the Helveys to reconsider their professional direction. In addition to a love of financial astuteness, they shared a passion for quality automobile maintenance. Over the past weeks, they had begun thinking through the possibilities of launching a venture in the car maintenance business. The concept they had in mind was a somewhat novel idea that they called Carly’s Car Clinic. In researching the possibilities for the new venture, the Helveys had looked at potential locations for the clinic. Hunter Black, a friend of one of their tax clients, had suggested a pair of properties (one on the north side of town and the other on the south side of town) that appeared to be exactly what the Helveys were looking for. Both properties were under development in what were expected to become desirable shopping areas. The Helveys doubted that they could find any property that would be more suitable to their business concept. Suddenly they were seriously considering opening two shops rather than just one. While Black was willing to build out both properties for what the clinic needed, the sites would still require the Helveys to make up-front capital investments in fixtures, fittings, and equipment. Black stated that he needed to know by the end of next week whether the Helveys wanted to lease the properties. He expressed, however, a willingness to allow them to delay their decision for up to one year, for an up-front fee of what would amount to be an after-tax payment of $15,000 for each property. Since the business model was novel, the Helveys believed the outcome of their business was largely binary—either the concept would flourish or it would flounder—and the probability of each outcome was about equal. They also believed the outcome for one store would mirror the outcome of the other, meaning that if the business flourished at one store, it would also flourish at the other store, and vice versa. To quantify the financial outcomes, they had come up with cash-flow estimates that mirrored both scenarios. Based on the forecasts, the after-tax present value of investing in both stores was $620,000 [$310,000 + $310,000] under the flourish scenario and $180,000 [$110,000 + $70,000] under the flounder scenario. See Exhibit 1 for the details of the store-level estimates of the up-front capital investment and the present value of the annual cash flow. In the exhibit, all values were calculated in time 0 present values. This fictional case was prepared by Michael J. Schill, Sponsors Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2022 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to
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Page 2 UV8448 At a risk-adjusted cost of capital of 7%, it didn’t take long for Carly to realize that the investment didn’t make economic sense. The net present value (NPV) of the $420,000 [$220,000 + $200,000] investment was −$20,000. She obtained this value using the following calculation: NPV = Expected present value less the investment in both stores = 50% probability of flourish outcome × Value of flourish outcome + 50% probability of flounder × Value of flourish outcome – Investment required for both stores = 0.50 ($620,000) + 0.50 ($180,000) – ($220,000 + $200,000) = −$20,000 But Myron recognized that they shouldn’t be too quick to give up on the NPV analysis. He noted that the $15,000 delay option was valuable. To explain his insight, he noted, “It’s kind of like the lunch buffet here at the Jasmin Palace, Carly. You never know day to day if the samosas are going to be any good. I never get a plate if we’re ordering from the menu. But with the lunch buffet, I’m able to sample one samosa first. If the first one is good, I fill an entire plate. If not, I eat something else.” Carly smiled, enjoyed a last bite of rogan josh, and started writing some figures on a napkin. Do Not Copy or Post This document is authorized for educator review use only by Rendy Siswanto, Other (University not listed) until Feb 2025. Copying or posting is an infringement of copyright.
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Page 3 UV8448 Exhibit 1 Carly’s Car Clinic Store Investment and Cash-Flow Benefit Estimates North Store Expected up-front capital investment: $220,000 Present value (time 0) of after-tax cash-flow benefits: Flourish outcome: $310,000 (probability = 50%) Flounder outcome: $110,000 (probability = 50%) South Store Expected up-front capital investment: $200,000 Present value (time 0) of after-tax cash-flow benefits: Flourish outcome: $310,000 (probability = 50%) Flounder outcome: $70,000 (probability = 50%) Do Not Copy or Post This document is authorized for educator review use only by Rendy Siswanto, Other (University not listed) until Feb 2025. Copying or posting is an infringement of copyright.
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