Yukon Ltd is a Canadian department store.The Management have built up a successful business in the Yukon
Question:
Yukon Ltd is a Canadian department store.The Management have built up a successful business in the Yukon state and are considering expanding its sales outlets to one of three locations. It aims to buy a retail outlet of approximately 2800m2. Costings and information associated with each capital investment is detailed below.
Ontario
Manitoba
Nunavut
Data
Population of area
15 million
1.2 million
36,000
Affluence of population
High
Medium
Low
% of population in customer target age range
32%
36%
45%
Annual corporate tax rate, payable 9 months after year end
11.50%
15%
9.50%
Length of investment years
5
5
5
Ontario
Manitoba
Nunavut
Costs and revenues (Canadian $)
Cost of retail space per m2
192.25
86.53
45.25
Estimate cost of purchasing a retail outlet of 2800m2
538,300
242,284
126,700
Refitting and rebranding costs
110,000
50,000
35,000
Recruitment and training of staff
18,000
12,000
11,000
Annual local business rates (property tax)
11,000
6500
4000
Resale value of property
350,000
135,000
55,000
Annual electricity costs to runs
32,000
28,000
18,000
Staffing costs
320,000
260,000
220,000
Maintenance
18,000
4,000
2,700
Annual Sales
922,000
770,000
634,000
Other running costs
136,000
145,000
108,500
Additional investment required in inventory
1,590,000
1,080,000
870,000
Additional funding required for credit customers (trade receivables)
85,000
55,000
95,000
Required: (show your workings for each answer)
a)Yukon Ltd has 64% debt financing and 34% equity financing.The pre-tax cost of debt is 5%.The cost of cost of equity is 12%. It pays an average corporation tax rate of 15%.Calculate the Weighted Average Cost of Capital for Yukon Ltd and explain the implications of this for capital investment decisions.
b)Calculate the annual cash flows associated with each investment for years 0 to 5.You should make realistic assumptions concerning the timing of all cash flows if not specified above.
c)Calculate the net present value for the three investments. If you have not attempted part a) assume a cost of capital of 7%.
d)Calculate the Accountant's rate of return for the three investments
e)Interpret your results and provide a comprehensive discussion of the additional information that Yukon Ltd should consider before making a decision over which option to take.
Expert Answer:
