You want to open a coffee shop, which costs $50,000 now. There are two options. First,...

 

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You want to open a coffee shop, which costs $50,000 now. There are two options. First, keep operating it yourself. It generates a positive cash flow of $25,000 per year. Second option, sell it after one year for $65,000. See the cash flows illustrated below. t = 0 (1) -$50,000 (2) -$50,000 1 $25,000 $65,000 2 $25,000 $25,000 To decide which option is better, how should we account for the possibility that the $65,000 in the second option can be reinvested in publicly traded financial securities? Explain your answer. You want to open a coffee shop, which costs $50,000 now. There are two options. First, keep operating it yourself. It generates a positive cash flow of $25,000 per year. Second option, sell it after one year for $65,000. See the cash flows illustrated below. t = 0 (1) -$50,000 (2) -$50,000 1 $25,000 $65,000 2 $25,000 $25,000 To decide which option is better, how should we account for the possibility that the $65,000 in the second option can be reinvested in publicly traded financial securities? Explain your answer.

Answer rating: 100% (QA)

SOLUTION To compare the two options we need to calculate the net present value NPV of each option Th... View the full answer