Use the Following Information to Answer the Question(s)below

question 70

Multiple Choice

Use the following information to answer the question(s) below.
Two years ago,Krusty Krab Restaurant purchased a grill for $50,000.The owner,Eugene Krabs,has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill.This new grill can be purchased for $80,000 and would be depreciated straight line over 8 years,after which it would have no salvage value.Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next eight years while the existing grill produces EBITDA of only $35,000 per year.The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value.All other operating expenses are identical for both grills.The existing grill can be sold to another restaurant now for $30,000.Krusty Krab's tax rate is 21%.
-If Krusty Krab's opportunity cost of capital is 12%,what decision should Krusty Krab take regarding the new grill?

• A)Do not install the new grill since NPV is approximately = - $16,183
• B)Install the new grill since NPV is approximately = + $16,183
• C)Install the new grill since IRR is approximately = 15%
• D)Do not install the new grill since IRR is less than 12%

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Definitions:

Producer Surplus

The difference between the amount a producer is willing to accept for a good or service and the actual amount received from selling it at the market price.

Cupcakes

Small, individually-sized cakes that are typically frosted and decorated, often used to celebrate events or milestones.

Total Surplus

Total surplus is the sum of consumer surplus and producer surplus in a market, representing the total benefits to both buyers and sellers from trade.

Producer Surplus

The difference between the amount that producers are willing to sell a good for and the actual amount received by them.