Question
The owner of Saskatoon Corporation has asked managers to submit capital project proposals for potential new stores. One option is to open the store in
The owner of Saskatoon Corporation has asked managers to submit capital project proposals for potential new stores. One option is to open the store in Edmonton, Alberta. The other option is to open the store in Yellowknife, North West Territories. The company does not have the financial capitability to do both projects and therefore only one of the two stores will move forward. The company expects a minimum return of 16% and requires a minimum payback period of 5 years. Ignore Taxes.
A) Which store would you open using the NPV method?
B) What store would you open using the Profitability Index?
C) What store would you open using the Payback Method?
D) Taking into account all three methods, what overall recommendation would you make to the owner? Why?
\begin{tabular}{|c|c|c|} \hline & Edmonton & Yellowknife \\ \hline Initial investment for construction & 800000 & 1000000 \\ \hline Initial investment for Equipment & 195000 & 140000 \\ \hline Working capital required & 144000 & 165000 \\ \hline Net Annual Cash Inflows Over Expected Life & 200000 & 220000 \\ \hline Expected life & 20 years & 30 years \\ \hline Salvage value of store assets at end of expected life & 0 & 100000 \\ \hline Maintenance of equipment in year 10 & 44000 & 26000 \\ \hline Maintenance of equipment in year 20 & 0 & 18000 \\ \hline Release of working capital at end of expected life & 144000 & 165 \\ \hline \end{tabular}
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