Ques. 1

ABC Corporation wants to relocate its new warehouse in order to save money. The expected savings (cash flow) in the next five years in each location are shown in the following tables. The investment required and cash flows depend on the location, access to highways, local taxes and other related costs associated with the location.

Calculate the Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR) and profitability index of each location.Based on the four capital budgeting tools, Create a table, and based on your findings, recommend where ABC build its new warehouse.The locations are mutually exclusive, which means ABC can choose only one location.

Please note that each location has a different cost of capital to allow for the different risks associated with each location. All the numbers are in thousands of dollars.

Cranbrook, BC

Year Cash flow

0 -$5,000

1 $2000

2 $2000

3 $2000

4 $2000

5 $2000

Cost of Capital: 6%

Okotoks, AB

Year Cash flow

0 -$6,000

1 $2500

2 $2500

3 $2500

4 $2500

5 $2500

Cost of Capital: 7%

Kindersley, SK

Year Cash flow

0 -$7,000

1 $3000

2 $3000

3 $3000

4 $3000

5 $3000

Cost of Capital: 8%

Onoway, AB

Year Cash flow

0 -$8,000

1 $3200

2 $3200

3 $3200

4 $3200

5 $3200

Cost of Capital: 9%

Morden, MB

Year Cash flow

0 -$7500

1 $3100

2 $3100

3 $3100

4 $3100

5 $3100

Cost of Capital: 8%

Ques. 2:

Stephen Herron, owner of a small manufacturer, Intuitive Technology (IT), has asked you to provide your opinion on the options available to replace an old machine. Two suppliers have provided price and cost estimates. The supplier of the old machine, Canadian Equipment Inc. (CEI), has improved its equipment but continues with the same specialized design. A new supplier, Alto Design Equipment (ADE), has a new innovative design that can process the products produced by IT.

Stephen is excited about the new design. Its products usually have a short life cycle where sales increase for five years and then decline. IT could use the new design proposed by ADE to process its products that will stabilize output over the next five years. IT's cost of capital is 10%. After careful analysis of the two designs, he prepares the following forecast of the expected cash flows.