Question: A retail company plans to expand its operations by investing in new stores, requiring an investment of Rs. 500 lakhs. The expansion is projected to
A retail company plans to expand its operations by investing in new stores, requiring an investment of Rs. 500 lakhs. The expansion is projected to yield the following cash flows over the next seven years:
| Year | Cash Flow (Rs. in lakhs) |
|---|---|
| 1 | 100 |
| 2 | 120 |
| 3 | 140 |
| 4 | 160 |
| 5 | 180 |
| 6 | 200 |
| 7 | 220 |
The cost of capital for the project is 9%, and the new stores will be depreciated on a straight-line basis over their useful life of seven years. The residual value of the stores at the end of seven years is estimated to be Rs. 50 lakhs. Assume no income tax.
Requirements:
- Calculate the net present value (NPV) of the project.
- Determine the internal rate of return (IRR) of the project.
- Compute the payback period.
- Evaluate the profitability index of the project.
- Advise whether the company should proceed with the expansion based on the NPV and IRR.
Step by Step Solution
There are 3 Steps involved in it
Solution To address the problem we need to calculate the Net Present Value NPV Internal Rate of Return IRR Payback Period and Profitability Index of t... View full answer
Get step-by-step solutions from verified subject matter experts
Study Help