Your firm, Land's End, is considering opening another retail outlet store. You have already spent $15,000 hiring
Question:
Your firm, "Land's End," is considering opening another retail outlet store. You have already spent $15,000 hiring a consultant who has selected an excellent location for the new store. The new store will require $400,000 cash upfront (year 0) to purchase new sales equipment and build out the new location. Once built, the store is expected to generate cash flows of $40,000 a year for the next 20 years (the first cash flow comes in year 1). After 20 years, you expect to sell the equipment you purchased in year 0 for $50,000.
You project has a beta of 1.2, the risk-free rate is 2% and the equity risk premium is 5%. You can assume the CAPM holds and ignore taxes.
a) Find the project's NPV rounded to the nearest dollar. According to the NPV rule, should the project be taken?
b) Find the project's IRR rounded to the nearest tenth of a percent (e.g., 1.7% or 2.1%). According to the IRR rule, should the project be taken?
Business Communication Process and Product
ISBN: 978-0324542905
6th Edition
Authors: Mary Ellen Guffey