Limitless Ltd. is planning to buy a new warehouse to store its production output. The investment would
Question:
Limitless Ltd. is planning to buy a new warehouse to store its production output. The investment would require £500,000 to be paid upfront. Thanks to the new warehouse, the company expects to increase its profits by £120,000 annually for the next five years, and then £60,000 for the following five years.
A. Calculate the Net Present Value (NPV) of this investment opportunity if the cost of capital is 12%.
B. Should Limitless Ltd. go ahead with the purchase of the new warehouse? Explain your reasoning.
C. What is the payback period of this investment?
D. Suppose the Internal Rate of Return (IRR) of this investment opportunity is 15%. The information alone, should Limitless Ltd make the investment?
Why? Would this decision be consistent with that from question ? Explain your reasoning.