Location: Laguna Hills, CA
The attached spreadsheet model is for Pure Light located in Laguna Hills, CA, which is a candle studio and craft store that is currently listed for sale at $110,000. This model includes a pro forma income statement and balance sheet for Pure Light based on market assumptions in the area and an analysis of the costs of capital and internal rate of return forecasted for the business. It also presents several possible outcomes including bankruptcy and a weighted expected return based on good and bad market scenarios. The model allows variables to be changed for all major inputs of the computations.
The chosen model scenario calculates the weighted average cost of capital for Pure Light to be 6.86% at a level of 46% equity. The internal rate of return of the free cash flows was determined to be 7.96%, which exceeds the cost of capital for the business. With these projections the given price of $110,000 comes out to be reasonable.
Understanding that there is a large risk that these projections are too optimistic, a model was created for potential bankruptcy. After four years, bankruptcy is declared and all assets are paid off. The sale of the assets is able to cover the secured mortgage loan, but the extra bank loan is only paid in 42 cents on the dollar.
To determine an expected net present value, scenarios were made above and below the current model and then weighted against each other. The expected net present value using WACC as the discount rate was found to be -$3,950. The second weighted net present value includes expansion to another store in year 5 for the good scenario. This raised the expected net present value to $3,657.