Suppose a firm has two business options to choose from and has asked you - a Business
Question:
Suppose a firm has two business options to choose from and has asked you - a Business Mathematics student - to help them make a decision. Option "A" requires an immediate cost of $20 000 along with "upgrade costs" of $15 000 in year 3 and $17 500 in year 6. The returns from these investments begin in year 2 and are estimated to be $13 000 per year for 3 years, $14 000 per year for the next 3 years, and then $18 000 in years 8 and 9 respectively. The only return in year 10 is a residual value of $5000. Option "B" requires a cost today, and in years 1 and 2 of $19 000 and has estimated returns beginning in year 4 and ending in year 10 of $16 000 per year. There will also be a residual value of $13 000 in year 10. Find the NPV (Net Present Value) for each of the two options available to the business based on the information given. Assume the business's required return on investment - the value of money or discount rate - is 15 percent. Explain which, if either, of these two options you would recommend to the business AND why.
Net Present ValueWhat is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Step by Step Answer:
Contemporary Business Mathematics with Canadian Applications
ISBN: 978-0134141084
11th edition
Authors: S. A. Hummelbrunner, Kelly Halliday, Ali R. Hassanlou, K. Suzanne Coombs