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sleet_krkn [62]
3 years ago
12

A shoe store is for sale for $2,000,000. It is estimated that the restaurant will earn $200,000 a year for the next 11 years. At

the end of 11 years, it is estimated that the restaurant will sell for $3,500,000. What would be most likely to occur if the investor's required rate of return is 15%?
Business
1 answer:
Sergio [31]3 years ago
4 0

Answer:

The NPV is -$200956.3508. Thus, the shop will not be purchased as the NPV from this investment is negative.

Explanation:

To take the decision to buy or not buy the shoe store, we need to calculate the Net Present Value of the investment in the shoe shop. The net present value (NPV) is the present value of future expected cash inflows from the investment less the initial outlay/cost.

If the NPV is positive, the investment will be done and shop will be purchased and vice versa.

As the cash in flows consist of an annuity of 200000 for 11 years along with a principal sale value, the NPV will be,

NPV = PV of Annuity + PV of Principal - Initial cost

NPV = 200000 * [ (1 - (1+0.15)^-11)  /  0.15 ]  +  3500000 / 1.15^11  - 2000000

NPV = -$200956.3508

The shop will not be purchased as the NPV from this investment is negative.

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3 years ago
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm’s t
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Based on the DuPont equation and given information, ROE of Harrington Inc is 13.818%.

Explanation:

We have to find the total equity and total debt of Harrington Inc in order to apply the DuPont equation for finding ROE because net income, sales of Harrington Inc. are already given.

- To find Harrington Inc's total debt, apply the Debt-to-capital formula: The Harrington Inc's total debt/The Harrington Inc's total capital = 45% =>  Harrington Inc's total debt = The Harrington Inc's total capital * 45% = $250,000 x 45% = $112,500;

- To find Harrington Inc's total equity, apply the accounting equation Asset = Liabilities + Owner's Equity: The Harrington Inc's total equity = The Harrington Inc's total asset - The Harrington Inc's total debt = $250,000 - $112,500 = $137,500;

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