Reference no: EM132906868

Yuga Furniture is a furniture manufacturer that emphasizes elegant design and durable build quality. Rising sales have created a need for the company to open an additional factory to meet demand. It is considering two locations for the factory. Location A is in an area with a large skilled workforce, excellent infrastructure for transportation and communications, and a stable economy with low inflation. Wages are high in Location A, as are the regulations placed on businesses. It can be difficult to navigate the process of establishing a new business project, and projects are sometimes delayed due to local pressure groups that are concerned with the area's rapid development.

• Location B is in an area with higher unemployment and a smaller pool of skilled workers, though the region has made substantial progress in the quality of its education in the last 10 years, and economic growth is strong. The inflation rate has been somewhat volatile over the last 20 years, though it is projected to stabilize in the next few years. Regulations and taxes are lower in Location B. While Location B is closer to Yuga's largest markets, its infrastructure is in need of upgrades. The government is attempting to begin a public private partnership to upgrade the port, and Yuga Furniture's management assumes this will be completed by the end of the second year of the project. Both factories would operate for 10 years until they needed to be renovated and equipment upgraded.

Project managers estimate that Location A would cost $250,000,000 to construct, and Location B would cost $180,000,000. The firm has prepared the following cash flow estimated for the two projects.

Year [0]; Location A Net Cash Flow, $ [(250,000,000)]; Location B Net Cash Flow, $ [(180,000,000)]
Year [1]; Location A Net Cash Flow, $ [45,000,000]; Location B Net Cash Flow, $ [25,000,000]
Year [2]; Location A Net Cash Flow, $ [55,000,000]; Location B Net Cash Flow, $ [30,000,000]
Year [3]; Location A Net Cash Flow, $ [55,000,000]; Location B Net Cash Flow, $ [50,000,000]
Year [4]; Location A Net Cash Flow, $ [55,000,000]; Location B Net Cash Flow, $ [50,000,000]
Year [5]; Location A Net Cash Flow, $ [55,000,000]; Location B Net Cash Flow, $ [50,000,000]
Year [6]; Location A Net Cash Flow, $ [55,000,000]; Location B Net Cash Flow, $ [50,000,000]
Year [7]; Location A Net Cash Flow, $ [55,000,000]; Location B Net Cash Flow, $ [50,000,000]
Year [8]; Location A Net Cash Flow, $ [55,000,000]; Location B Net Cash Flow, $ [50,000,000]
Year [9]; Location A Net Cash Flow, $ [50,000,000]; Location B Net Cash Flow, $ [45,000,000]
Year [10]; Location A Net Cash Flow, $ [50,000,000]; Location B Net Cash Flow, $ [45,000,000]

Problem 1: Calculate the payback period for both projects. Please show working.

Problem 2: Calculate the average rate of return for both projects. Please show working.

Problem 3: Explain one benefit and one limitation to Yuga Furniture using the payback period as a basis for financial analysis.

Problem 4: Explain one benefit and one limitation to Yuga Furniture using the average rate of return as a basis for financial analysis.

Problem 5: On the basis of financial and non financial factors, recommend location A or location B for Yuga Furniture's project.