You are supporting a regional banking expansion review and your CFO asks you to walk through the kind of financial model you built for opening a new retail branch. You need to evaluate whether one proposed branch creates value under a 5-year forecast using GAAP-style pre-tax operating assumptions and an after-tax discounted cash flow. Assume the branch is funded internally, all figures are in USD, and you only have the operating and balance-sheet drivers below. Your recommendation will be used in an investment committee memo.
| Metric | Value |
|---|---|
| Initial build-out capex (Year 0) | $4,500,000 |
| Year 1 deposits | $120,000,000 |
| Annual deposit growth | 8% |
| Net interest margin on deposits | 3.2% |
| Annual fee income (Year 1) | $600,000 |
| Non-interest operating expense (Year 1) | $2,400,000 |
| Operating expense growth | 3% |
| Provision for credit losses as % of revenue | 6% |
| Tax rate | 25% |
| Incremental working capital investment as % of revenue | 2% |
| Discount rate | 10% |
| Terminal value multiple on Year 5 FCF | 8.0x |
How would you build and explain this model, and based on the numbers would you recommend opening the branch? Be explicit about the forecast drivers, free cash flow, valuation, and the key sensitivities that would change your decision.