The Tiffany Company, a leading Italian fashion company, is planning to open a new store in Canada. The executives have to choose one city for their new store. They have two cities – Vancouver and Toronto left in their final option. A Canadian consulting firm provided the following information to the Tiffany executives:
• In Vancouver, the immediate required new investment is $500,000. The future cash flows are expected to be $100,000 at the end of year 1, $180,000 at the end of year 2, $200,000 at the end of year 3, and $190,000 at the end of year 4.
• In Toronto, the immediate required investment is $3 million. The future cash flows are expected to be $500,000 at the end of year 1, $900,000 at the end of year 2, $1,300,000 at the end of year 3, and $1,180,000 at the end of year 4. Assuming a 10% discount rate is used.
a) Determine the IRR for the Vancouver project;
b) Determine the NPV for the Toronto project;
c) Determine the Profitability Index (PI) for the Toronto project;
d) Determine the Payback Period (PP) for the Vancouver project.