Bruceton's is a specialty retailer with multiple brick-and-mortar stores and a cost of capital of 16.4 percent.Specialty Imports is a wholesaler of specialty items and has a cost of capital of 12.6 percent.Both firms are considering opening a new store in downtown Chicago at a cost of $1.1 million.Because this type of store would be trendy, it would have a life of only 8 years and no salvage value.The expected annual net cash flow is $229,000, regardless of which firm opens the store.Which company(ies), if either, should open the Chicago store?

Question

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The net present value (NPV) of the project should be calculated for both companies using their respective costs of capital. Since the expected annual net cash flow is the same for both, the company with the lower cost of capital (Specialty Imports) would have a higher NPV. However, if neither company's NPV is positive, neither should undertake the project. Given the high cost of capital and the cash flows, it's likely that neither company achieves a positive NPV.

Bruceton's Is a Specialty Retailer with Multiple Brick-And-Mortar Stores and a Cost