BLC Ltd. is a medium-sized UK manufacturing company based in Liverpool. The comp

Question

BLC Ltd. is a medium-sized UK manufacturing company based in Liverpool. The company is seeking to expand its operations with the establishment of an office block to house the marketing and human resources staff in Manchester.

The company has narrowed the choice to two alternatives with the following net cash flow information being available:

Items to keep in mind:

The company’s current cost of capital is 10%.

For this assignment, ignore taxation.

Year Property 1 Property 2 £000s £000s 0 (2,500) (2,750) 1 1,000 900 2 500 700 3 600 800 4 1,000 600 5 900 700

Explanation / Answer

Property 1 Property 2 Year Discount Factor @10% Cash Flow''000 pounds PV of Cash Flows Cash Flow''000 pounds PV of Cash Flows Year 0       1.0000      (2,500.00)         (2,500.00)        (2,750.00)          (2,750.00) Year 1       0.9091        1,000.00               909.09              900.00                818.18 Year 2       0.8264            500.00               413.22              700.00                578.51 Year 3       0.7513            600.00               450.79              800.00                601.05 Year 4       0.6830        1,000.00               683.01              600.00                409.81 Year 5       0.6209            900.00               558.83              700.00                434.64 Total $           514.95 $              92.20 NPV of Property 1 is higher that property 2. So Property 1 can be chosen.

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