Question

Consider the owner of a local boutique. She is deciding if she should upgrade the storage and display containers. The total cost is $2,000, and the depreciation rate is 8% per year. The expected increase in next year’s revenue resulting from the investment is $400. Assume an interest rate of 5%. a. What is the present value of the stream of revenue due to the upgrades? Round to the nearest dollar. $ b. Based on the marginal principle, the owner make this investment because the marginal benefit is the marginal cost.

Answer 1

Answer:

a) $3077

b) The owner should make this investment because the marginal benefit is greater than the marginal cost

Explanation:

Given data :

Total cost = $2000

depreciation rate = 8% per year

expected increase in revenue (CF ) = $400

interest rate = 5%

a) Determine the present value of the stream of revenue due to the upgrades

= CF / ( 1 + r ) ^t      where ( 1 + r )^t = 13%

= 400 / 13%

= $3077

b) The owner should make this investment because the marginal benefit is greater than the marginal cost