Korral Kids is a chain of children's premium outdoor clothing that is expanding into a neighbouring city. It can lease space in a downtown location requiring a major refitting for a cost of $550,000. Instead it could lease a smaller mall location with lower traffic but would only require redecoration and furnishing at $250,000. Income before depreciation expense for the mall location over the next three years is $40,000, $65,000, $85,000. It is projected to be $90,000 for the three years after that. Expected cash inflow for the downtown location is projected at $90,000, $125,000, $165,000, and $185,000 for the three years after that. If the company is looking for a 14% return it should

Question

Quizplus · Accepted Answer

To determine the best option, we need to calculate the net present value (NPV) of both choices. Using a discount rate of 14%, the NPV of the downtown location is $76,424 and the NPV of the mall location is $33,520. Therefore, the best choice is to invest in the downtown location as it has the higher NPV.

Korral Kids Is a Chain of Children's Premium Outdoor Clothing