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The owner of the Krusty Krab is considering selling his restaurant and retiring

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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.

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 profit at the end of the year.  In one year the owner will sell the restaurant for $350,000.

 

a) If the interest rate is 7%, the NPV of alternative #1 is closest to:

A) $350,000

B) $357,000

C) $375,500

D) $400,000

 

 

b) If the interest rate is 7%, the NPV of alternative #2 is closest to:

A) $350,000

B) $357,196

C) $370,561

D) $401,121

 

 

c) If the interest rate is 7%, the NPV of alternative #3 is closest to:

A) $350,000

B) $357,196

C) $370,561

D) $401,121

 

d) If the interest rate is 7%, the alternative with the highest NPV is:

A) Alternative #1 with an NPV of approximately $350,000

B) Alternative #2 with an NPV of approximately $370,561

C) Alternative #3 with an NPV of approximately $357,196

D) Alternative #2 with an NPV of approximately $380,561