document.write( "Question 1201866: 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? \n" ); document.write( "

Algebra.Com's Answer #836422 by ikleyn(52878) $\"\"$ $\"About$

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\n" ); document.write( "Reggie has just taken over management of a family business.
\n" ); document.write( "He wants to make sure that it makes financial sense to keep the business going.
\n" ); document.write( "He could sell the building today for $610,000.
\n" ); document.write( "Keeping the business going will require a $60,000 renovation now and will yield
\n" ); document.write( "an annual profit of $72,000 for the next 25 years
\n" ); document.write( "(for simplicity assume these occur at year end, beginning one year from now).
\n" ); document.write( "The $\"highlight%28cross%28discount%29%29\"$ interest rate is 6%. What are the NPV and IRR of this decision?
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document.write( "NPV is the net present value.\r\n" );
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document.write( "In this problem, it is the difference of the present value of the given\r\n" );
document.write( "ordinary annuity and the this year investment for renovation\r\n" );
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document.write( "    NPV = PV - 60000  dollars.\r\n" );
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document.write( "For the present value PV of the annuity, use the standard formula\r\n" );
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document.write( "    PV = .\r\n" );
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document.write( "Here PMT = 72,000 dollars; r = 0.06/12 = 0.005; n= 25 years.  So,\r\n" );
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document.write( "    PV =  =  = 1688085.94  dollars.\r\n" );
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document.write( "    NPV = PV- 60000 = 1688085.94 - 60000 = 1,628,085.94  dollars.\r\n" );
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document.write( "You may compare it with $610,000 for selling the building now.\r\n" );
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