1. NPV = 1728828.94 - 1500000 = $ 228828.94. 2. If there is recession then the c

Question

1. NPV = 1728828.94 - 1500000 = $ 228828.94.

2. If there is recession then the cash inflow would be 55% of (a) i.e. 1728828.94 * 55% = $950855.92.

Hence the NPV woul be negative which is $(549144.083).

Hi, I need help answering problems 3-5. Thank you!

Financial Options: NPV Exercise David and Jennifer are looking to buy an existing business that's for sale. They found two stores that intrigue them. Let's call them Store A and Store B Both stores are for sale at the same price, $1.5 million. The uncertainty David and Jennifer are facing is the health of the economy. They researched the economic forecasts and believe that there is a 65% chance the economy will remain strong and a 35% chance that the economy may slip into a recession. If the economy does go into a recession, their expected sales will decrease. They must pay $1.5 million now (Year 0) to purchase either store. Their cost of capital is 15.0%.

Explanation / Answer

Will take data from your answer for 1 & 2

Ans 3) NPV = 65% of 1728828.94 + 35% of $950855.92 - 1500000 = -$43461.62

For 4 I required data for Store A as well.

Ans 5) people with extremely risk averse expect that when economy perform badly then they will incur less loss and this strategy will force the David and Jennifer to select the store with lover NPV.

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