Pinecrest Cold Storage: Investment Case Study with Answer
Should a cold-storage operator invest about $60 million in a new temperature-controlled warehouse, and at which of two sites? A free hard investment case study with 7 questions, 3 exhibits and a model answer for every question. About 40 minutes. No login to read.
The live case is a different client with its own data, so you practice without knowing the answers. The client and every number on this page are made up for practice.
Logistics / Cold-chain warehousing · Interviewer-led · McKinsey style
New to investment cases? Learn the method first: Investment Case Interview Example: Worked Answer and NPV.
The case
Our client, Pinecrest Cold Storage, runs temperature-controlled warehouses across the US. It is weighing a new warehouse of 40,000 pallet positions for about $60 million, at one of two sites: a port corridor or an inland rail hub. The CEO wants to know whether to invest and, if so, where.
Pinecrest rents refrigerated and frozen pallet positions to grocers, food manufacturers and importers. It earns a yearly fee per occupied pallet position, covering storage and the handling in and out. Its nine existing warehouses hold about 280,000 pallet positions and run at 88% utilization on average.
The board has approved a growth budget but will fund only one warehouse. Management has narrowed the choice to Site A, in a port corridor close to a container terminal, and Site B, at an inland rail hub that serves grocery distribution. Construction takes about 18 months, and the company evaluates projects on a 15-year view.
Interviewer's data, shared if asked
- US demand for cold storage has grown about 5% a year, driven by frozen food, grocery e-commerce and pharmaceutical distribution.
- Both sites would have 40,000 pallet positions. Site A costs $60 million because port-corridor land is expensive; Site B costs $54 million.
- The board wants a payback inside 8 years and a positive net present value at an 8% discount rate, ignoring taxes.
- Existing regional capacity is nearly full around the port (4% vacancy) and looser around the rail hub (9% vacancy).
- Pinecrest has no signed customers for either site yet, though some current customers have said they would take space at either one.
Question 1 · Structure
How would you structure your analysis of whether Pinecrest should build this warehouse, and where?
Hint: An investment decision has three parts: is the market there, do the economics pay back the money, and which option fits best. Add the risks that could break the answer.
Model answer
I would answer one question: does the warehouse earn more than the $60 million it costs, and which site earns more per dollar and per unit of risk. I would build the structure around demand, economics, site fit and risks.
Then I would compare the two sites on the same basis, using the board's own tests: payback inside 8 years and a positive net present value at 8%.
- Market and demand: regional demand growth, existing capacity and vacancy, customer types (grocers, manufacturers, importers), likelihood of pre-signed anchor customers.
- Economics: capacity x utilization ramp x revenue per occupied position, less variable and fixed costs, against the capital cost; payback and net present value.
- Site fit: access to customers, ports, rail and highways, power cost and reliability, labor, land cost and permitting.
- Risks: slower fill than planned, price pressure from rival builds, construction overruns, power costs and climate exposure.
What the interviewer is looking for
- Good: covers demand, economics and risks in a structure specific to warehouses, not a generic profit tree.
- Strong: ties the structure to the decision tests (payback, net present value) and says the sites must be compared on one basis.
- Excellent: names utilization ramp as the key swing driver, since a warehouse earns nothing on empty positions but carries fixed costs from day one.
Push-back: You have many branches. If you could only check one number first, which would it be and why?
Question 2 · Judgment
Before we look at any numbers, what qualitative factors would make one location more attractive than the other?
Interviewer's data, shared if asked
- Site A is 30 minutes from a container terminal, in a flood-prone zone where the building must be raised, and local wages are rising quickly.
- Site B is on a rail line serving large grocery distribution centers, 500 miles from the coast, with cheaper land and labor.
Hint: Think about who the customers are, how their goods arrive, and what could disrupt the building.
Model answer
Location matters most through customers and logistics: a cold warehouse is full when the goods that need it pass nearby. Site A sits next to imports of frozen seafood and produce, which need space the day a ship arrives and pay for convenience. Site B serves grocery distribution and food manufacturers, who sign longer, steadier contracts but tend to shop on price.
I would also weigh operating exposure. A port site faces flood and storm risk, tighter labor and likely higher power cost. An inland hub has cheaper land and labor, but more competing space and demand that depends on a few big grocery customers.
- Demand pull: customer base nearby, vacancy in the area, and the chance to pre-sign anchor tenants.
- Access: truck, rail and port connections, and how far goods travel to reach the building.
- Cost and risk: land, labor and power cost, climate exposure, permitting time.
What the interviewer is looking for
- Good: names customers, access and cost factors for both sites.
- Strong: links each factor to a financial driver, such as utilization, price per position or variable cost.
- Excellent: separates factors that raise revenue from factors that reduce risk, and notes they pull in different directions here.
Push-back: A port location sounds expensive. Why would any customer pay more to be there?
Question 3 · Math
Using Exhibit A, what is Site A's annual operating profit once it reaches steady state, and what is the operating margin and return on the $60 million?
| Input | Site A plan |
|---|---|
| Pallet positions | 40,000 |
| Steady-state utilization | 85% |
| Revenue per occupied position per year ($) | 650 |
| Variable cost per occupied position per year ($) | 250 |
| Fixed costs per year ($M) | 4 |
| Capital cost ($M) | 60 |
Variable cost covers labor, power and handling. Fixed costs cover maintenance, insurance, property tax and site management.
Hint: Start with occupied positions, then revenue, then variable cost, then take off fixed costs.
Model answer
Occupied positions = 40,000 x 85% = 34,000. Revenue = 34,000 x $650 = $22.1 million. Variable cost = 34,000 x $250 = $8.5 million. Fixed costs are $4.0 million.
Operating profit = 22.1 - 8.5 - 4.0 = $9.6 million a year. That is a 43.4% operating margin and a 16% yearly return on the $60 million.
| Line | Site A, steady state ($M) |
|---|---|
| Revenue | 22.1 |
| Variable cost | 8.5 |
| Fixed costs | 4.0 |
| Operating profit | 9.6 |
What the interviewer is looking for
- Good: builds profit from occupied positions and lands on $9.6 million.
- Strong: states the margin and the return on capital without being asked twice, and keeps units straight.
- Excellent: points out that 16% is a steady-state figure, so the ramp years will pull the real return well below it and push payback out.
Push-back: That is a steady-state profit. Why would it take longer than 6 years to earn back $60 million at $9.6 million a year?
Question 4 · Exhibit
Look at Exhibit B. How do the two sites compare, and what does the table not tell you yet?
| Metric | Site A (port corridor) | Site B (inland rail hub) |
|---|---|---|
| Capital cost ($M) | 60.0 | 54.00 |
| Pallet positions | 40,000 | 40,000 |
| Capital cost per position ($) | 1,500 | 1,350 |
| Steady-state utilization | 85% | 80% |
| Revenue per occupied position ($) | 650.0 | 520.00 |
| Variable cost per occupied position ($) | 250.0 | 240.00 |
| Fixed costs ($M per year) | 4.0 | 3.50 |
| Annual operating profit at steady state ($M) | 9.6 | 5.46 |
| Pre-leased to anchor customers at opening | 30% | 65% |
| Years to reach steady state | 4.0 | 3.00 |
Operating profit = occupied positions x (revenue - variable cost) - fixed costs.
Hint: Compare profit per dollar invested, then ask what makes each site's numbers more or less certain.
Model answer
Site A is clearly stronger on steady-state economics: $9.6 million of profit on $60 million is a 16.0% return, against $5.46 million on $54 million, or 10.1%, at Site B. Site A earns $650 a position against $520, and the $130 gap more than covers its $10 higher variable cost and $0.5 million higher fixed cost. Site A also fills to 85% against 80%.
Site B is the safer fill: 65% pre-leased at opening against 30%, and steady state in 3 years against 4. The table does not tell us how reliable Site A's 85% and $650 are. Both depend on port customers who have not yet signed, and it ignores flood exposure and a high-wage labor market. Exhibit B alone cannot show how long the ramp takes to pay back.
What the interviewer is looking for
- Good: reads the table correctly and picks Site A on profit.
- Strong: compares return on capital, not just profit, and sees that Site B's lower capital cost does not close the gap.
- Excellent: spots that Site A's advantage depends on price and fill assumptions that are least proven, while Site B's pre-leasing is a risk offset.
Push-back: Site B costs $6 million less and fills faster. Why is that not enough to make it the better choice?
Question 5 · Math
Using Exhibit C, what is the payback period for each site? Then what is each site's net present value over 15 years at an 8% discount rate?
| Year | Site A utilization | Site A profit ($M) | Site B utilization | Site B profit ($M) |
|---|---|---|---|---|
| 1 | 40% | 2.4 | 60% | 3.22 |
| 2 | 60% | 5.6 | 75% | 4.90 |
| 3 | 75% | 8.0 | 80% | 5.46 |
| 4 | 85% | 9.6 | 80% | 5.46 |
| 5 to 15 (each year) | 85% | 9.6 | 80% | 5.46 |
Capital cost is paid at the start (year 0). Profit is treated as cash flow received at the end of each year, before tax.
Interviewer's data, shared if asked
- Treat the capital cost as paid at the start and each year's profit as received at the end of that year.
- Ignore taxes, and assume no sale value for the building after year 15.
- A discount factor for year n is 1 / 1.08 to the power n; the annuity shortcut is fine for years with equal profit.
Hint: Payback: add up profit year by year until you pass the capital cost. NPV: discount the first three years one by one, then treat the equal years as a block.
Model answer
Payback at Site A: cumulative profit is 2.4, 8.0, 16.0, then 25.6 after year 4, and 54.4 after year 7. It needs $5.6 million more in year 8, which is 5.6 / 9.6 = 0.58 of that year. Payback is about 7.6 years, inside the 8-year limit. At Site B, cumulative profit is $51.8 million after year 10 and it needs $2.2 million more, which takes 0.4 of year 11. Payback is about 10.4 years, outside the limit.
Net present value at 8%: for Site A, years 1 to 3 are worth 2.22 + 4.80 + 6.35 = $13.37 million. Years 4 to 15 are 12 equal payments of $9.6 million, worth $57.43 million today. Total is $70.80 million against a $60 million cost, so NPV is about +$10.8 million. For Site B, years 1 and 2 are worth 2.98 + 4.20 = $7.18 million, and years 3 to 15 are 13 payments of $5.46 million, worth $37.00 million today. Total is $44.18 million against $54 million, so NPV is about -$9.8 million.
| Present value at 8% ($M) | Site A | Site B |
|---|---|---|
| Year 1 | 2.22 | 2.98 |
| Year 2 | 4.80 | 4.20 |
| Year 3 | 6.35 | in block below |
| Equal-profit block (A: years 4 to 15, B: years 3 to 15) | 57.43 | 37.00 |
| Total present value | 70.80 | 44.18 |
| Capital cost | -60.00 | -54.00 |
| Net present value | 10.80 | -9.82 |
| Payback (years) | 7.60 | 10.40 |
What the interviewer is looking for
- Good: computes cumulative profit correctly and gets payback near 7.6 years for Site A.
- Strong: sets up the NPV with discounted years and a clean annuity block, and compares both sites against the board's tests.
- Excellent: sanity-checks that A passes both tests (payback under 8 years, positive NPV) and B fails both, and notes how thin A's payback margin is.
Push-back: Site A passes the 8-year test by only five months. How confident are you that it truly passes?
Question 6 · Judgment
What are the biggest risks to your answer, and what would have to be true for you to change it?
Hint: Name the risk that moves the NPV the most, test how far it can fall before the answer flips, and say how you would reduce it before committing.
Model answer
The biggest risk is fill. Site A has only 30% pre-leased, and its profit is driven by occupancy: each 10 points of utilization is 4,000 positions, or $1.6 million of yearly profit at a contribution of $400 per position. If Site A tops out at 75% instead of 85%, profit from year 4 drops to $8.0 million and the NPV falls from about +$10.8 million to about +$1.2 million. The break-even is about 4,500 fewer occupied positions, a steady-state utilization of about 74%.
So the margin for error is real but not wide, which is why I would make the investment conditional. I would change my answer to Site B or no-go if anchor customers will not commit to about half of Site A's capacity before construction, if price per position comes in well below $650, or if flood-proofing and power costs push the capital cost materially above $60 million. Site B fails the board's tests on current numbers, so its lower risk does not rescue it unless its price or fill improves.
What the interviewer is looking for
- Good: names fill, price and construction cost as the risks to the answer.
- Strong: quantifies how far utilization can fall before NPV hits zero rather than just saying it is risky.
- Excellent: turns the risk into a condition, such as anchor commitments before groundbreaking, and says what would flip the choice to Site B.
Push-back: A competitor could build next door and cut prices 10%. How would that change your answer?
Question 7 · Synthesis
The CEO walks in and needs a decision. Give me your recommendation in 60 seconds.
Hint: Answer first, then the two or three numbers that prove it, then the condition and the next steps.
Model answer
Go, and build at Site A, the port corridor, provided anchor customers commit before construction starts. At steady state Site A earns $9.6 million a year on $60 million, a 16% return, against $5.46 million on $54 million, or 10%, at Site B.
Over 15 years at 8%, Site A has an NPV of about +$10.8 million and pays back in about 7.6 years. Site B has an NPV of about -$9.8 million and pays back in about 10.4 years, so it fails both of the board's tests. The risk is fill: Site A still breaks even at roughly 74% utilization, against 85% planned, but only 30% is pre-leased today.
Next steps: secure signed commitments for about half of Site A's capacity before groundbreaking, price the flood-proofing and power into the $60 million, and rerun the NPV with those firm numbers.
What the interviewer is looking for
- Good: gives a clear go and a site, with the NPV and payback.
- Strong: compares against the other site and the board's tests in the same breath.
- Excellent: names the key risk with its break-even point and ends with concrete next steps that reduce it.
Model recommendation
Show the recommendation
Go: build the new warehouse at Site A, the port corridor, conditional on signed anchor customers before construction starts.
Site A earns $9.6 million a year at steady state on $60 million, a 16% return, with an NPV of about +$10.8 million at 8% over 15 years and a payback of about 7.6 years. Site B earns $5.46 million on $54 million, a 10% return, with an NPV of about -$9.8 million and a payback of about 10.4 years.
The main risk is fill, since only 30% of Site A is pre-leased. Site A still breaks even at about 74% utilization against 85% planned, so there is room for error but not a lot.
Next steps: secure commitments for about half of Site A's capacity, confirm flood-proofing and power costs inside the $60 million, and reconsider Site B only if its price per position or fill improves materially.
Written by Road to Offer. Updated November 7, 2026. Every client and number in this case is made up for practice.