So I'm on the last question of my accounting and finance module for my MBA and i just can't wrap my head around it. So here's the question:
Evaluate which showroom should be selected or rejected. (Ms Rachel Casper has suggested a preference for NPV method, however the CEO and Finance Director particularly are in favour of IRR. Use the WACC as your discount rate to evaluate the investment projects.
The WACC I have worked out is 9.74% but I don't know whether its my constant study (whilst holding a full time job) but I just can't do this question. So here's the background info:
The showroom would be leased over a period of 5 years and
the total initial cost of investment is projected to be £20 million.
It is expected that the City Centre showroom will increase the overall sales by 3.5 % and gross profit by 1.8 % every year. However, the fixed overhead will increase £200,000, £350,000 and £150,000 in first three years with £nil increase in years 4 and 5. All other costs are estimated to increase by 3.5% every year. In the second year company will need a working capital investment of £1 million, 40% of this value will be recovered in year 4. The company is following a straight line depreciation policy and it is calculated that at the end of year five the company could possibly sell the assets at 10 % of historical cost.
On the other hand, if the showroom is opened at Cross Gate then it will require fixed overhead investment for four years - £250,000 in the first year, £nil in the second year, £180,000 in the third year, £210,000 in the fourth year and £110,000 in the fifth year. However, other costs will increase at a 2.5% rate per year. The working capital investment will be £800,000 in year three and 75% of it will be recovered in the last year. The sales and gross profit will increase at 3.2% and 1.5% respectively. The Company will follow the same policies for depreciation.
Literally any help you could give me would be so so greatly appreciated!!
Does anyone use their degree?