Gadgets, Inc. needs to allocate this years capital expenditure budget to either construction of a...
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Gadgets, Inc. needs to allocate this years capital expenditure budget to either construction of a new retail outlet or investment in product enhancement. The marketing department has prepared estimates of the predicted increase in sales resulting from each project. The required investment for each project is known and will be depreciated over five years. The required rate of return for both projects is identical to the firms cost of capital of 15%. Their tax rate is 34%. New Retail Outlet Year 0 1 2 3 4 5 Investment $1,300.00 Revenue - $2,000.00 $2,100.00 $2,205.00 $2,315.25 $2,431.01 Expenses - $1,100.00 $1,155.00 $1,212.75 $1,273.39 $1,337.06 Product Enhancement Year 0 1 2 3 4 5 Investment $1,200.00 Revenue - $1,500.00 $1,575.00 $1,653.75 $1,736.44 $1,823.26 Expenses - $800.00 $840.00 $882.00 $926.10 $972.41 (All figures in thousands)
4.a Calculate net cash flows for each project?
4.b Calculate the NPV of each project. Which project should you choose?
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