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KengaRu [80]
3 years ago
9

Kelly Slater owns a parcel of land in Palm Springs and is considering two possible development options which both use his signat

ure Kelly Slater Wave Pool technology.
Option A: Create a private surf club, in which case he would have to invest $10 million today (EOY 0). The club would then generate an annual free cash flow of $2 million in perpetuity starting EOY 1.
Option B: Create a surf resort and hotel open to the public, in which case he would have to invest $50 million today (EOY 0). The resort would then generate an annual free cash flow of $6.5 million in perpetuity starting EOY 1.

Assume Kelly's discount rate is 10% and that he can only invest in one of the two options. Kelly should: ________

a. Accept both options because they both have positive NPV
b. Choose Option A because it has a higher IRR
c. Reject both options because both have an IRR less than 10%
d. Choose Option B because it has a higher NPV
Business
1 answer:
expeople1 [14]3 years ago
7 0

Answer:

d. Choose Option B because it has a higher NPV

Explanation:

The computation is shown below:

For Option A:

Investment = $10 million

Present Value of cash flows = Cash flow ÷ Discounting rate

= $2 ÷  10%

= $20 million

Now

NPV = $20 - $10

= $10 million

We know that

IRR is the rate at which the NPV will be zero

So,  2 ÷  r - 10 = 0

r = 20%

For Option B:

Investment = $50 million

Present Value of cash flows = $6.5 ÷  10% = $65 million

NPV = $65 - $50 = $15 million

we know that

IRR is the rate at which the NPV will be zero

So, 6.5÷ r -50 = 0

r = 13%

Based on NPV, Option B should be selected as it contains higher NPV as compared to option A.

However, Based on IRR, Option A should be chosen as it contains higher IRR and a higher IRR represent a higher profit percentage

 

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On the other hand a culture that makes use of monochronic time values doing a thing at a time and find it easier to meet their targets.

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Luke invested $110 at 3% simple interest for a period of 6 years. How much will his investment be worth after 6 years?
Finger [1]

Answer:

investment after 6 years = $129.80

Explanation:

given data

invested = $110

simple interest = 3%

period = 6 years

to find out

How much will his investment be worth after 6 years

solution

first we get here interest that is express as

interest = invested amount × rate × time    ..................1

interest = $110 × 3% × 6

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and

investment after 6 years = invested amount + interest   .................2

investment after 6 years = $110 + $19.8

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Answer:

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The Fed can reduce the interest rate, which will shift the MP curve down and increase GDP.

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