Question

"Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's store. The cost of the expansion will be $148,000. She can use this additional space to add children’s clothing, an exclusive gifts department, or a home décor section. She estimates the present value of the cash inflows from these projects are $121,000 for children’s clothing, $178,000 for exclusive gifts, and $145,000 for decorator items. Which option(s), if any, should she accept?"
a. Children’s clothing only
b. Exclusive gifts only
c. Exclusive gifts and decorator items only
d. All three options
e. None of these options

Answer 1

Answer: Option(b) is the correct option.

Explanation:

According to the question,we are provided with investment value which is $148,000.

• Therefore, Net present value (NPV)of Children Clothing will be calculated as :-

        $121,000 - $148,000  = - $27,000

Thus, a negative value of NPV of children clothing is      obtained which is not an acceptable value option.

• Now ,Net present value(NPV) of Exclusive gift is as follows:-

$178,000 - $148,000= $30,000

As the obtained NPV value for exclusive gift option is $30,000 which is a positive value, it can be accepted

• Now, calculation of NPV of decorator items is as follows:-

 $145,000 - $148,000= - $3,000

Net present value of decorator items is obtained as -$3,000 which is a negative value.Thus, it is not acceptable.

Therefore, the correct option is option(b) because it as positive value of NPV and decorator items and children clothing as negative NPV value which makes them unacceptable .