Daniel was recently recruited as the Financial Manager of Royal Apparels. He previously served

as a junior financial executive in a similar company for the past 4 years, where he primarily

focused on more operational, financial matters. Therefore, he has had no experience dealing with

significant financial matters and doesn't want to make any mistakes. Therefore, Daniel requires a

detailed report from you, a talented group of MBA students, before finalizing any significant

decisions.

Royal Apparels is a major retail company which sells its 'own brand' products. It was

established in 2003 and has found quick success in the Canadian apparel market. However, the

company is now contemplating whether to capture a rapidly expanding overseas market by

opening new retail outlets. Past experience from entering other overseas markets has shown that

several factors would decide the brand's acceptance. The potential of the market for the future

can be indicated in sales for the first five years.

How the brand would be accepted will likely determine year 1 sales. A cost of $500,000 was

incurred to employ a consultancy firm with experience in the overseas market, to provide

detailed information on the market, and to estimate the likelihood of brand acceptance. The

consultancy firm estimated that there is a high chance that the brand will be well received, and

sales in year 1 will be $125,000,000. Sales are then expected to increase by $50,000,000

annually.

In order to develop and fit out the retail outlets, an investment of $75,000,000 is required. It is

expected that the retail outlets will have a residual value of $15,000,000 at the end of five years.

A further $2,000,000 will be required for working capital.

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Fixed costs relating to the retail outlets, excluding depreciation, are expected to be $65,000,000

per annum and remain the same for the five-year period. It is also anticipated that a further

$25,000,000 will be spent on marketing the brand in each of the five years. Furthermore, the

company will have to pay $900,000 and $650,000 in Year 1 to the relevant Canadian and

international authorities, respectively, as permit fees. An additional $400,000 will be incurred

annually as salary and benefit payments for employees employed at each retail outlet. The

company also has planned to incur an amount of $1,200,000 for the annual maintenance of each

retail outlet. The company uses a cost of capital of 9% per annum to evaluate projects of this

type. Daniel has been tasked to advise the company's directors whether they should go ahead

with the investment from a financial perspective. The company generally evaluates projects of

this nature upon completion as well.

Required:

Prepare a report on the following for Daniel;

1. Advise the directors of the company whether they should go ahead with the investment

from a financial perspective. You should use net present value (NPV) as the basis of your

evaluation. Workings should be shown in $000