None The owner of the Krusty Krab is considering selling his restaurant and retiring. An investorhas offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement.The owner is considering the following three alternatives:1. Sell the restaurant now and retire.I2. Hire someone to manage the restaurant for the next year and retire. This will require theowner to spend $50,000 now but will generate $100,000 in profit next year. In one year,the owner will sell the restaurant for $350,000.3. Scale back the restaurant's hours and ease into retirement over the next year. This willrequire the owner to spend $40,000 on expenses now but will generate $75,000 in profit atthe end of the year. In one year, the owner will sell the restaurant for $350,000.If the interest rate is 7%, calculate the NPV of all three alternatives. Based on your calculation,which of the three alternatives is the best choice?

Step 1:1)We have to calculate the NPV of the first alternative.The NPV of this alternative would be…

Answered: The owner of the Krusty Krab is…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 1R

See similar textbooks

Similar questions

Use the information below to answer the following question(s): The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives: 1. Sell the restaurant now and retire. 2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant for $350,000. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses 3. now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant for $350,000. If the discount rate is 15%, the alternative with the lowest NPV is: #1 with an NPV of approximately $350,000. #2 with an NPV of approximately $341,300. #3…
Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each option but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $27,500, and Harold expects to spend about $600 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $10,900. Alternatively, Harold could lease the same vehicle for five years at a cost of $3,575 per year, including maintenance. Assume a discount rate of 12 percent. Required: Calculate the net present value of Harold’s options. (Future Value of $1,Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) Advise Harold about which option he should choose.
Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each option but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $29,500, and Harold expects to spend about $800 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $11,700. Alternatively. Harold could lease the same vehicle for five years at a cost of $3.835 per year, including maintenance. Assume a discount rate of 10 percent. Required: 1. Calculate the net present value of Harold's options. (Euture Value of $1. Present Value of $1. Euture Value Annuity of $1. Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your final answers to 2 decimal places. Do not round intermediate calculations.) NPV Purchase Option Lease Option
Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each option but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $28,000, and Harold expects to spend about $650 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $11,100. Alternatively, Harold could lease the same vehicle for five years at a cost of $3,640 per year, including maintenance. Assume a discount rate of 10 percent. Required: 1. Calculate the net present value of Harold's options. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your final answers to 2 decimal places. Do not round intermediate calculations.) Purchase Option Lease Option NPV
The Petersik family is considering purchasing a second home to use for short term rentals near the beach. If it purchases the house, they will place a down payment of $64,000 on the house. They estimate they will get an annual net rental profit of $8,500 after their mortgage and expenses are paid. After 18 years, they plan to pass the rental home along to their children, so assume the home has negligible salvage value. What would be the ERŘ if the Petersik family decides to invest in a rental home, assuming they keep the home for 18 years? Assume their MARR is 13%. Should the Petersik family invest in the rental home?
Mr. Grayson is considering giving up his paid employment and going into business on his ownaccount. He is considering buying a quarry pit with a “life” of about 35 years. To purchase thisbusiness, he would have to pay sh 4,750,000 now. Mr. Grayson wishes to retire in 20 years’time. He predicts that the net cash operating receipts from this business will be sh 1,250,000 perannum for the first 15 years and sh 1,000,000 per annum for the last 5 years. He thinks that thebusiness could be sold at the end of the 20 year period for sh 1,500,000. Additionally, heestimates that certain capital replacements and improvements would be necessary and this shouldamount to sh 100,000 per annum for the first 5 years; sh 150,000 per annum for the next 5 years,sh 200,000 per annum for the next 7 years and nothing for the last three years. This expenditurewould be incurred at the start.Mr. Grayson has excluded any compensation to himself from the above data. If he shouldpurchase the business, however, he…
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,530 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,070 and $850, respectively.Alternatively, Mr. Fitch could purchase for $9,960 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,440 and $2,350, respectively.Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.Required Determine the payback period and unadjusted rate of return (use average investment) for each…
3. Your favorite neighbor Poindexter learns you are pursuing an MBA and seeks your advice on how to finance his next vehicle. He has gathered information about each option but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $26,500, and he expects to spend about $500 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $10,500. Alternatively, Poindexter could lease the same vehicle for five years at a cost of $5,000 per year, including all maintenance. The lease payments are made at the beginning of each year. Assume a discount rate of 10%. o Provide an analysis for Poindexter at 10%. o Provide the same analysis for good old Poindexter assuming a rate of 5%. At what rate will he be indifferent? o
Lenny, a real estate professional, has found a retail outparcel for sale for $5,000,000 for a client he is representing. Lenny's analysis suggests the property will be worth $7,000,000 in 2 years after the site's land use is reclassified to allow for a mixed use development. Before the client is willing to make an offer, she wants to know what the annual return will be. What is the annual rate of return on this investment? A) 18.32% B) 40% C) 6.13% D) 11.87%
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,980 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,010 and $840, respectively. Alternatively, Mr. Fitch could purchase for $9,960 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,380 and $2,400, respectively. Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent. Required a. Determine the payback period and unadjusted rate of return (use average investment) for each…
Valley Pizza’s owner bought his current pizza oven two years ago for $9,000, and it has one more year of life remaining. He is using straight-line depreciation for the oven. He could purchase a new oven for $1,900, but it would last only one year. The owner figures the new oven would save him $2,600 in annual operating expenses compared to operating the old one. Consequently, he has decided against buying the new oven, since doing so would result in a “loss” of $400 over the next year. Required:1. How do you suppose the owner came up with $400 as the loss for the next year if the new pizza oven were purchased? Explain.2. Criticize the owner’s analysis and decision.3. Prepare a correct analysis of the owner’s decision.
The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low. Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business? If the owner is optimistic about the company's future sales, should the company expand by purchasing the equipment? Is the owner's optimism or pessimism about sales the only factor that may impact the company's profits? The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?

SEE MORE QUESTIONS

Recommended textbooks for you

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Essentials of Business Analytics (MindTap Course …

Statistics

ISBN:

9781305627734

Author:

Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:

Cengage Learning

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Essentials of Business Analytics (MindTap Course …

Statistics

ISBN:

9781305627734

Author:

Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS