(Present value tables are needed.) O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000
Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available:
Indiana proposal Kentucky proposal
Required investment $1,920,000 $2,500,000
Estimated life 10 years 10 years
Estimated residual value $50,000 $80,000
Estimated annual cash inflows over the next 10 years $400,000 $500,000
Required rate of return 10% 10%
The net present value of the Indiana proposal is closest to
A) $538,000.
B) $557,300.
C) $461,650.
D) $1,171,800.
B
Explanation: B)
Cash flow $400,000 × (PVA 10yr @ 10%) 6.145 = 2,458,000
Residual 50,000 × (PV 10 yr @ 10%) .386 = 19,300
Less Cost -1,920,000
NPV 557,300
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