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

question 27

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 discount rate is 15%,the alternative with the lowest NPV is:

• A)#1 with an NPV of approximately $350,000.
• B)#2 with an NPV of approximately $341,300.
• C)#3 with an NPV of approximately $329,570.
• D)#2 with an NPV of approximately $400,000.
• E)None of the above

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Definitions:

Operating Expenses

Definition: Costs associated with the day-to-day operations of a business, excluding cost of goods sold.

Sears

A former major American chain of department stores known for selling a wide range of products, from clothing to appliances.

Breakeven Price

The amount of money for which selling a product or service neither results in a profit nor a loss.

Overhead Expenses

Costs that are not directly associated with the production of goods or services, such as rent, utilities, and administrative expenses.