Mega Store is considering opening a new store location. Project A would involve opening a new store in Revelstoke, and Project B would involve opening a new branch in West Kelowna.
|
Project A |
Project B |
||
|
Initial cash outlay |
$(900,000) |
$(500,000) |
|
|
Upgrades required in year 4 |
(100,000) |
(250,000) |
|
|
Year 1 |
$ 350,000 |
$ – |
|
|
Year 2 |
350,000 |
– |
|
|
Year 3 |
350,000 |
300,000 |
|
|
Year 4 |
350,000 |
400,000 |
|
|
Year 5 |
350,000 |
800,000 |
|
The company’s cost of capital is 6%, which is an appropriate discount rate.
Required:
a) Compute the net present value of each project and conclude on which project should be selected. (7 marks)
undefined
b) Assume Mega Store has limited funds to invest and is considering two projects, both with positive net present values. Using the profitability index, rank the order of preference for these investments. (3 marks)
0 comments