Bradley Corporation's required rate of return is 14%. The company has an opportunity to be the...

Bradley Corporation's required rate of return is 14%. The company has an opportunity to be the exclusive distributor of a very popular consumer item. No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns. The warehouse cost $200,000 new. The warehouse is currently half-empty and there are no other plans to use the empty space. In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line. The company would have the distributorship for only 5 years. The distributorship would generate a $17,000 annual net cash inflow. (Ignore income taxes in this problem.)

What is the net present value of the project? What is the project’s internal rate of return?

Please show all steps.

Expert Solution

The investment in the warehouse as already been made. It is not relevant to this project since it has no other use. If this project is not undertaken, the warehouse would still not be in use. It is a sunk cost.

Additionally, working capital would be released at the end of this project. So it would become an inflow at the end of fifth year,

Year	Cash Flow	PV Factor	Present Value
		1 / ( 1 + 14%)^Year	Cash Flow X PV Factor
0	$ (100,000.00)	1.000	$ (100,000.00)
1	$ 17,000.00	0.877	$ 14,912.28
2	$ 17,000.00	0.769	$ 13,080.95
3	$ 17,000.00	0.675	$ 11,474.52
4	$ 17,000.00	0.592	$ 10,065.36
5	$ 17,000.00	0.519	$ 8,829.27
5	$ 100,000.00	0.519	$ 51,936.87

			$ 10,299.24

NPV at 14% is 10,299.24. We know that at IRR, NPV is ZERO

Let us take NPV at 17%

Year	Cash Flow	PV Factor	Present Value
		1 / ( 1 + 17%)^Year	Cash Flow X PV Factor
0	$ (100,000.00)	1.000	$ (100,000.00)
1	$ 17,000.00	0.855	$ 14,529.91
2	$ 17,000.00	0.731	$ 12,418.73
3	$ 17,000.00	0.624	$ 10,614.30
4	$ 17,000.00	0.534	$ 9,072.05
5	$ 17,000.00	0.456	$ 7,753.89
5	$ 100,000.00	0.456	$ 45,611.12

			$ -

Well the IRR is 17%

ekkarill92 answered 2 hours ago

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