Answer:
As per our research the complete question is
<em>The owner of a local cinema is considering two alternative plans for renovating and improving his theater. Plan A calls for an initial cash investment of $250,000, whereas Plan B requires only an $180,000 immediate cash outlay. It has been estimated that the net cash income stream generated from Plan A would be $630,000 per year for three years, while Plan B would only generate $580,000 per year over the same period. If the prevailing interest rate for the next three years is 10% per year, which Plan will generate a higher net income at the end of the three years.</em>
Detail Answer is given below.
Explanation:
Plan A will generate higher income at the end of three year.
Plan A
Year- time Outlay* Discount Factor** Net present value Calculation***
1 630,000 0.9091 572,727.27
2 630,000 0.8264 520,661.16
3 630,000 0.7513 473,328.32
Inflow -
0 250,000 1.0000 (250,000.00)
1,316,716.75
Plan B
Year- time Outlay Discount Factor Net present value Calculation
1 580,000 0.9091 527,272.73
2 580,000 0.8264 479,338.84
3 580,000 0.7513 435,762.58
Inflow -
0 180,000 1.0000 (180,000.00)
1,262,374.15
* Outlay as given in question
** DF=(1+i)^year where i =10% interest rate
*** PV=Outlay*DF
As shown in above calculation NPV of plan A is more than that of Plan B.
