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. I 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%, calculate the NPV of all three alternatives. Based on your calculation, which of the three alternatives is the best choice?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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.
I
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%, calculate the NPV of all three alternatives. Based on your calculation,
which of the three alternatives is the best choice?
Transcribed Image Text: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. I 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%, calculate the NPV of all three alternatives. Based on your calculation, which of the three alternatives is the best choice?
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