Question

Flo is considering three mutually exclusive options for the additional space he plans to add to the K-State Superstore. The cost of the expansion will be $148,000. He can use this additional space to add children’s clothing, and exclusive gifts department, or a home décor section. He estimates the present value of the cash inflows from these projects is $221,000 for children’s clothing, $178,000 for exclusive gifts, and $145,000 for decorator items. Which option(s), if any, should he accept?
a. None of these options
b. Children’s clothing only
c. Exclusive gifts only
d. Exclusive gifts and decorator items only
e. All three options

Answer 1

Answer:

B) Children’s clothing only

Explanation:

cost of the expansion $148,000

three mutually exclusive projects:

• NPV $221,000 for children’s clothing ≥ $148,000 (initial investment)
• NPV $178,000 for exclusive gifts ≥ $148,000 initial investment
• NPV $145,000 for decorator items ≤ $148,000 initial investment

The projects whose NPV is positive should be considered (this eliminates decorator items)

Since the projects are mutually exclusive, only one can be chosen. So the project with the highest NPV is the best project for the store ⇒ children's clothing