Beverly's is a retail chain selling the latest fashions through its outlets located in various neighborhood malls.Clothing Galore is a wholesaler that buys from textile mills and sells to retail outlets.Beverly's has a cost of capital of 13.6 percent,while Clothing Galore's cost of capital is 17.8 percent.Both firms are considering opening a retail outlet in a gigantic new mall.Both proposals are quite similar in design and have basically the following financial features: an initial cash outlay of $2.7 million,a projected five-year life with no salvage value,and cash inflows of $845,000 a year for the life of the project.Which firm or firms,if either,should open a retail outlet in the new mall?

Question

Quizplus · Accepted Answer

NPV = -$2.7m + $845,000(PVIFA_{5, 13.6%}) = $229,061.Both firms should use Beverly's cost of capital of 13.6 percent as the project cost of capital. Since both projects have positive NPVs at 13.6 percent, both firms should open a retail outlet.

Beverly's Is a Retail Chain Selling the Latest Fashions Through