Question 1201866
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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 {{{highlight(cross(discount))}}} interest rate is 6%. What are the NPV and IRR of this decision?
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NPV is the net present value.


In this problem, it is the difference of the present value of the given
ordinary annuity and the this year investment for renovation

    NPV = PV - 60000  dollars.


For the present value PV of the annuity, use the standard formula


    PV = {{{PMT*((1 - (1+r)^(-n))/r)}}}.


Here PMT = 72,000 dollars; r = 0.06/12 = 0.005; n= 25 years.  So,


    PV = {{{72000*((1-(1+0.005)^(-25))/0.005)}}} = {{{72000*((1-1.005^(-25))/0.005)}}} = 1688085.94  dollars.


    NPV = PV- 60000 = 1688085.94 - 60000 = 1,628,085.94  dollars.


You may compare it with $610,000 for selling the building now.
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