Two Questions The owners of a fast food restaurant spend 28 million installing d
ID: 2700243 • Letter: T
Question
Two Questions
The owners of a fast food restaurant spend 28 million installing donut makers in all in their restaurants. This is expected to increase cash flows by 10 million per year for the next five years. If the discount rate is 6.5%, were the owners correct making the the decision to install donut makers?
A) No, as it has a NPV of -2.25 million
B) No, as it has a NPV of -1.68 million
C) Yes, as it has a NPV of 8.74 million
D) Yes, as it has a NPV of 13.56 million
An orcharder spends 100,000 to plant pomegranate bushes. It will take 4 years for the bushes to provide a usable crop. He estimates that every year for the next 20 years after that he will sell enough worth 10,000 per year. If the discount rate is 8%, what is the net present value of this investment?
A) -27,834
B)-12,897
C) 108
D) 3,268
Explanation / Answer
1)
NPV = -28 + 10/1.065 + 10/1.065^2 + 10/1.065^3 + 10/1.065^4 + 10/1.065^5 = 13.56
D) Yes, as it has a NPV of 13.56 million
2)
NPV = -100000 + 10000/1.08^5 + ... + 10000/1.08^24 = -27834
Hence
A) -27,834
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