document.write( "<A HREF=/cgi-bin/jump-to-question.mpl?question=1201866>Question 1201866</A>: <I><SPAN STYLE=\"word-break: break-all;\"> Reggie has just taken over management of a family business. He wants to make sure that it makes financial sense to keep the business going. He could sell the building today for $610,000. Keeping the business going will require a $60,000 renovation now and will yield an annual profit of $72,000 for the next 25 years (for simplicity assume these occur at year end, beginning one year from now). The discount/interest rate is 6%. What are the NPV and IRR of this decision? </SPAN>\n" );
document.write( "</I><HR><TABLE width=100%><TR><TD><B><A HREF=http://www.algebra.com/>Algebra.Com's</A> Answer #836411 by </B><A HREF=/tutors/aboutme.mpl?userid=Theo><B>Theo(13342)</B></A><img src=\"/images/stars/stars-13.gif\" alt=\"\" >&nbsp;<A HREF=/tutors/aboutme.mpl?userid=Theo><IMG SRC=http://www.algebra.com/images/aboutme-small.gif BORDER=0 alt=\"About Me\" VALIGN=MIDDLE></A>&nbsp;<IMG SRC=http://www.algebra.com/cgi-bin/show-face.mpl?user=Theo><BR>You can <A HREF=\"/cgi-bin/embed-solution.mpl?show=1&solution=836411\">put this solution on YOUR website!</A><BR><SPAN STYLE=\"word-break: break-all;\"> he could sell the building tody for 610,000.<BR>\n" );
document.write( "to keep the business runing, he would have to spend 60,000 now and will yield an annual profit of 72,000 for the next 25 years.<BR>\n" );
document.write( "the discount interest rate if 6%.<BR>\n" );
document.write( "all profit is assumed to occur at the end of each year.\r<BR>\n" );
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document.write( "i used excel to create the cash flow and the NPV (net present value) and the IRR (internal rate of return).\r<BR>\n" );
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document.write( "the results are shown below:\r<BR>\n" );
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document.write( "plan A was keeping the business going.<BR>\n" );
document.write( "plan B wass to sell the building (and presumably leaving the business) for $610,000.\r<BR>\n" );
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document.write( "at 6% discount rate, the results showed that keeping the business for 25 years gave a higher NPV than selling the building and getting out of the business.\r<BR>\n" );
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document.write( "the internal rate of return of plan A, by itself, was 120% over the 25 year period.\r<BR>\n" );
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document.write( "the internl rate of return of plan A minus plan B was 9.68%, rounded to 2 decimal places.\r<BR>\n" );
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document.write( "since plan A NPV was greater than plan B at 6%, it is reasonable that the internal rate of return of plan A minus plan B was greater than 6%.\r<BR>\n" );
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document.write( "if you are looking at the results of the decision, you are probably looking at the results of plan A minus plan B comparison.\r<BR>\n" );
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document.write( "NPV plan A minus plan B comparison is $250,401.64 in favor of plan A.<BR>\n" );
document.write( "the internal rate of return of that decision is 9.68%, rounded to two decimal places.\r<BR>\n" );
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document.write( "plan A (keeping the business going) is the winner, as far as i can tell.<BR>\n" );
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