Question

Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend​ $50,000 now, but will generate​ $100,000 in profit next year. In one year the owner will sell the restaurant for​ $350,000. 3.Scale back the​ restaurant's hours and ease into retirement over the next year. This will require the owner to spend​ $40,000 on expenses​ now, but will generate​ $75,000 in profit at the end of the year. In one year the owner will sell the restaurant for​ $350,000. If the discount rate is​ 15%, then the alternative which the owner should choose​ is:

Answer 1

Answer:

The first alternative is better and should be selected because it generated a higher NPV

Explanation:

To determine the better alternative , we will compare the Net present value of the two options. The option with the higher NPV would be selected

NPV = Present value of cash inflow - initial cost

PV of inflow = 1.15^(-1) × 100,000   + 1.15^(-1) × 350,000=$ 391,304.3478

NPV = 391,304.3478   - 50,000= $341,304.3478

NPV =$341,304.34

PV of inflow = 1.15^(-1) × 75,000   + 1.15^(-1) × 350,000=369565.2174

NPV = 369,565.2174  - 40,000 =$329,565.2174

NPV =$329,565.21

The first alternative is better and should be selected