PROBLEMS$-$SERIES B

Problem $10-16$B Using present value techniques to evaluate alternative investment opportunities

Perry Automobile Repair Inc. currently has three repair shops in Boston. Jerry Perry, the president and chief executive officer, is facing a pleasant dilemma: the business has continued to grow rapidly and major shareholders are arguing about different ways to capture more business opportunities. The company requires a $12$ percent rate of return for its investment projects and uses the straight$-$line method of depreciation for all fixed assets.

One group of shareholders wants to open another shop in a newly developed suburban community. This project would require an initial investment of $$600,000$ to acquire all the necessary equipment, which has a useful life of five years with a salvage value of $$200,000.$ Once the shop begins to operate, another $$150,000$ of working capital would be required; it would be recovered at the end of the fifth year. The expected net cash inflow from the new shop follows.

$\backslash$table$[[$Year $1,$Year $2,$Year $3,$Year $4,$Year $5],[$$$75,000,$$$125,000,$$$190,000,$$$240,000,$$$300,000$