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.