please show work The owner of the Krusty Krab is considering selling his restaur

Question

please show work

The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the The owner is considering the following three Krusty Krab for $350,000 whenever the owner is ready for retirement. 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. 3. 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 now, but will generate $75,000 in prot at the end of the year. Inone year the owner will sell the restaurant for $350,000 16) [5 points] If the interest rate is 7%, the alternative with the highest NPV is:

Explanation / Answer

Option 1

NPV = $350,000

Option 2

-50,000+ 100,000/(1+0.07) + 350,000/(1+0.07)

=$ 370,560.74

Option 3

-40,000 + 75,000/(1.07) + 350,000/(1.07) = $ 357,196.26

So Option 2 ie Hiring someone to manage the restaurant provides the highest NPV and hence the best option.

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