1. Bloomingdales are considering opening a standalone store somewhere in Michiga
ID: 2786103 • Letter: 1
Question
1. Bloomingdales are considering opening a standalone store somewhere in Michigan, and they have narrowed the choice of locations to DeWitt and Bloomfield Hills. They have gathered the following information regarding each location: Data common to both locations: 10 year lifespan of project No salvage value for either building . Dewitt Bloomfield Hills Cost of Marketing Study in 2016 to determine which location would be more profitable Building construction cost, including all necessary equipment and machinery in the store Cost to improve infrastructure around building, including access to parking lot, lighting and signage Cost of scouting trip to each location by upper management 6 months ago Additional Net Working Capital needed Recovery of Net Working Capital in Year 10 Projected Annual Sales Projected Associated Costs (variable + fixed) Annual Depreciation Tax Rate Required Rate of Return $50,000 $50,000 $2,000,000 $9,000,000 $200,000 $500,000 $25,000 $25,000 $600,000 $200,000 30% $1,700,000 $1,105,000 30% $5,600,000 $3,450,000 $220,0005950000 30% 12% 1496 Based on the above data, calculate the NPV and IRR, and determine which location Bloomingdale's should choose.Explanation / Answer
NPV Initial Outflow Dewitt Bloomfiled Hills Building Cost 20,00,000 90,00,000 Other cost of Improvement 2,00,000 5,00,000 Additional NetworkingCapital Needed 2,00,000 2,00,000 Total Initial outflow (A) 24,00,000 97,00,000 Cost of Scounting Trip & Market Study is an historical cost not helpful in decision making Annual Sales 17,00,000 56,00,000 Annual Cost 11,05,000 34,50,000 Depreciation 2,20,000 9,50,000 Net Income 3,75,000 12,00,000 Tax 1,12,500 3,60,000 Annual Cash Inflow (Net Income-Tac+depn) 4,82,500 17,90,000 Discount Factor for 10 years 5.21611565 5.65022303 PV (B) 25,16,776 1,01,13,899 Working Capital Inflow after 10 years 60,000 60,000 discount factor of 10th year 0.26974381 0.32197324 PV( C ) 16,185 19,318 NPV(B+C-A) 1,32,960 4,33,218 IRR Calculate the PV at 18% Initial Outflow Dewitt Bloomfiled Hills Building Cost 20,00,000 90,00,000 Other cost of Improvement 2,00,000 5,00,000 Additional NetworkingCapital Needed 2,00,000 2,00,000 Total Initial outflow (A) 24,00,000 97,00,000 Cost of Scounting Trip & Market Study is an historical cost not helpful in decision making Annual Sales 17,00,000 56,00,000 Annual Cost 11,05,000 34,50,000 Depreciation 2,20,000 9,50,000 Net Income 3,75,000 12,00,000 Tax 1,12,500 3,60,000 Annual Cash Inflow (Net Income-Tac+depn) 4,82,500 17,90,000 Discount Factor for 10 years 4.49408629 4.49408629 PV (B) 21,68,397 80,44,414 Working Capital Inflow after 10 years 60,000 60,000 discount factor of 10th year 0.19106447 0.19106447 PV( C ) 11,464 11,464 NPV(B+C-A) (2,20,139) (16,44,122) IRR of Dewitt=14+132960/(132960+220139)*(18-14) 15.51% IRR of Bloomfiled=12+433218/(433218+1644122)*(18-12) 13.25% Since IRR is higher in case of Dewitt So Bllomingdale's should choose Dewitt Since it is higher than 2.26% than the expected 2% Calculation of discount Factor=1/(1+r)^n 14% 12% 18% 1 0.877192982 0.892857143 0.847457627 2 0.769467528 0.797193878 0.71818443 3 0.674971516 0.711780248 0.608630873 4 0.592080277 0.635518078 0.515788875 5 0.519368664 0.567426856 0.437109216 6 0.455586548 0.506631121 0.370431539 7 0.399637323 0.452349215 0.313925033 8 0.350559055 0.403883228 0.266038164 9 0.307507943 0.360610025 0.225456071 10 0.26974381 0.321973237 0.191064467 5.216115646 5.650223028 4.494086295
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