Question

The board have approached you to get your opinion of their expansion plan, which includes a chain of factory outlet stores. Below are the figures for the first one that is planned for a central Birmingham location next year.

Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates.

The investment consists of £2,000,000 for the land, building costs of £3,950,000, and £915,000 for fittings and equipment.

The cash flows in year 1 are expected to be: total sales revenue £14,300,000; the cost of Alpha products sold £3,950,000; Beta stock sold £2,830,000; staff costs £590,000; light & heat £838,000; other overheads £3,212,000. The cash flows for the following years are the same, but are expected to increase by 2% inflation each year.

Question 1

Using the information above and in accord with the above stated company policy you are required to calculate:

a) Net Present Value (NPV)  

Answer 1

NPV of the project is GBP 181,009.48