Question
Question 2 The board have approached you to get your opinion of their expansion plan, which includes a chain of factory outlet stores. Below are
Question 2
The board have approached you to get your opinion of their expansion plan, which includes a chain of factory outlet stores. Below are the figures for the first one that is planned for a central Birmingham location next year.
Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates.
The investment consists of 2,000,000 for the land, building costs of 3,950,000, and 915,000 for fittings and equipment.
The cash flows in year 1 are expected to be: total sales revenue 14,300,000; the cost of Alpha products sold 3,950,000; Beta stock sold 2,830,000; staff costs 590,000; light & heat 838,000; other overheads 3,212,000. The cash flows for the following years are the same, but are expected to increase by 2% inflation each year.
a) Payback period (PBP), Discounted Payback Period (DPBP) and Internal Rate of Return
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started