Business, 24.12.2019 19:31 anthonysutton82

The owner of a local cinema is considering two alternative plans for renovating and improving his theater. plan a calls for an initial cash investment of $250,000,whereas plan b requires only an $180,000

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Answer from: icantspeakengles

As per our research the complete question is

The owner of a local cinema is considering two alternative plans for renovating and improving his theater. Plan A calls for an initial cash investment of $250,000, whereas Plan B requires only an $180,000 immediate cash outlay. It has been estimated that the net cash income stream generated from Plan A would be $630,000 per year for three years, while Plan B would only generate $580,000 per year over the same period. If the prevailing interest rate for the next three years is 10% per year, which Plan will generate a higher net income at the end of the three years.

Detail Answer is given below.

Explanation:

Plan A will generate higher income at the end of three year.

Plan A

Year- timeOutlay*Discount Factor**Net present value Calculation***

1 630,000 0.9091 572,727.27

2 630,000 0.8264 520,661.16

3 630,000 0.7513 473,328.32

Inflow -

0 250,000 1.0000 (250,000.00)

1,316,716.75

Plan B

Year- timeOutlayDiscount FactorNet present value Calculation

1 580,000 0.9091 527,272.73

2 580,000 0.8264 479,338.84

3 580,000 0.7513 435,762.58

Inflow -

0 180,000 1.0000 (180,000.00)

1,262,374.15

* Outlay as given in question

** DF=(1+i)^year where i =10% interest rate

*** PV=Outlay*DF

As shown in above calculation NPV of plan A is more than that of Plan B.

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Answer from: Quest

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