Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant for $350,000. 3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant for $350,000. If the discount rate is 15%, then the alternative which the owner should choose is:

Question

Business

Jonathon

20 August, 04:56

Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant for $350,000. 3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant for $350,000. If the discount rate is 15%, then the alternative which the owner should choose is:

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Answers (1)

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Dork · Answer 1

The first alternative is better and should be selected because it generated a higher NPV

Explanation:

To determine the better alternative, we will compare the Net present value of the two options. The option with the higher NPV would be selected

NPV = Present value of cash inflow - initial cost

PV of inflow = 1.15^ (-1) * 100,000 + 1.15^ (-1) * 350,000=$ 391,304.3478

NPV = 391,304.3478 - 50,000 = $341,304.3478

NPV = $341,304.34

PV of inflow = 1.15^ (-1) * 75,000 + 1.15^ (-1) * 350,000=369565.2174

NPV = 369,565.2174 - 40,000 = $329,565.2174

NPV = $329,565.21

The first alternative is better and should be selected