Question

Manny Kurr is considering the purchase of a beauty salon. The initial cost of this purchase is $16,000. The after-tax cash flows from this investment should be $4,000 per year for the next 5 years. His opportunity cost of capital is 10 percent. Please calculate the following:
a) Payback—Should Manny buy the beauty salon based on payback if his required payback is less than three years?
b) The present value of the benefits (PVB)
c) The present value of the costs (PVC).
d) The net present value (NPV)—Should Manny buy the beauty salon based on NPV rules?
e) Profitability index (PI)—What does the profitability index mean in terms of buying the beauty salon?
f) Internal rate of return (IRR) (Hint: use interpolation)--Should Manny buy the beauty salon based on IRR rules?
g) Accounting rate of return (ARR)—Should Manny buy the beauty salon based on the ARR?


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  • CreatedJuly 31, 2015
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