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

question 89

Multiple Choice

Use the information below to answer the following question(s) :
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.
-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.

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Definitions:

ROE

Return on Equity - a financial ratio that measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested.

Debt Ratio

A financial ratio that measures the extent of a company's leverage, calculated by dividing total liabilities by total assets.

Profit Margin

Profit margin is a financial metric that measures the percentage of profit a company retains after subtracting its costs from its revenue, reflecting the overall profitability of the business.

Equity Multiplier

A financial ratio indicating how much of a company's assets are financed by stockholder's equity, illustrating the degree of financial leverage used.