Question
7. You are the owner of a small independent retail grocer in Herman Town. Your store is starting to get outdated, so you are
7. You are the owner of a small independent retail grocer in Herman Town. Your store is starting to get outdated, so you are considering several remodeling projects that should freshen it up and increase sales. Project A revamps your meat counter, project B brightens up the bakery goods section, project C reworks the produce section, and project D adds a new coffee bar to the front of the store. The analyst you have hired to evaluate these projects has given you the table below that includes the construction cost, the net present value evaluated at a cost of capital of 11%, and the internal rate of return for each project. [NOTE: Construction costs are already netted out of the NPV of project figures for each project.] Construction Cost NPV of Project @ 11% Internal rate of Return Project A B C D 500,000 150,000 200,000 300,000 60,000 9% 15,000 10,000 55,000 15% 6% 12% Consider the case where these projects are mutually exclusive. Your construction budget is large enough to finance any of them. Any unspent construction funds will be used to pay off loans that have a 11% interest rate, so the cost of capital is 11%. Which, if any, of these projects would you choose to do and why? (3) a. (3) b. Consider the case where these projects are not mutually exclusive, your cost of capital is 8%, and there is no constraint on the amount you can invest. Which, if any, of these projects would you choose to do and why? (6) C. Consider the case where these projects are not mutually exclusive, but your construction budget (i.e., maximum total construction costs) is limited to $650,000. The cost of capital is 8%. Which, if any, of these projects would you do and why?
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