← Suppose a firm has two business options to choose from and has asked you, a Business Mathematics student, to help it make a decision. Option "A" requires an immediate cost of $30,000 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, $16,000 per year for the next 3 years, and then $17,000 in years 8 and 9, respectively. The only return in year 10 is a residual value of $5,000. Option "B" requires a cost today and in years 1 and 2 of $23,000 and has estimated returns beginning in year 4 and ending in year 10 of $15,000 per year. There will also be a residual value of $11,000 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 16 percent. Explain which, if either, of these two options you would recommend to the business and why. The net present value of option A is $ (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.) The net present value of option B is $. (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.)
← Suppose a firm has two business options to choose from and has asked you, a Business Mathematics student, to help it make a decision. Option "A" requires an immediate cost of $30,000 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, $16,000 per year for the next 3 years, and then $17,000 in years 8 and 9, respectively. The only return in year 10 is a residual value of $5,000. Option "B" requires a cost today and in years 1 and 2 of $23,000 and has estimated returns beginning in year 4 and ending in year 10 of $15,000 per year. There will also be a residual value of $11,000 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 16 percent. Explain which, if either, of these two options you would recommend to the business and why. The net present value of option A is $ (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.) The net present value of option B is $. (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.)
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 8TP: Fenton, Inc., has established a new strategic plan that calls for new capital investment. The...
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Suppose a firm has two business options to choose from and has asked you, a Business Mathematics student, to help
it make a decision. Option "A" requires an immediate cost of $30,000 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, $16,000 per year for the next 3 years, and then $17,000 in years 8 and 9, respectively. The only return in
year 10 is a residual value of $5,000. Option "B" requires a cost today and in years 1 and 2 of $23,000 and has
estimated returns beginning in year 4 and ending in year 10 of $15,000 per year. There will also be a residual value of
$11,000 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
16 percent. Explain which, if either, of these two options you would recommend to the business and why.
The net present value of option A is $
(Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places
as needed.)
The net present value of option B is $.
(Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places
as needed.)
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