Isabella is considering three mutually exclusive options for the additional spac

Question

Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts department, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should Isabella accept? a)None of these options b)Fabric and quilting only c)Exclusive gifts only d)Exclusive gifts and decorator items only e)All three options

Explanation / Answer

Since the options are mutually exclusive, she can only choose one option.

Net Present Value for fabric and quilting = 114000 - 127000 = -$13000

Net Present Value for exclusive gifts = 163000 - 127000 = $36000

Net Present Value for fabric and quilting = 138000 - 127000 = $11000

Since the NPV for exclusive gifts is the highest, she should choose the exclusive gifts option only.

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