(Present value tables are needed.)O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available: The net present value of the Indiana proposal is closest to

Question

(Present value tables are needed.)O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available:  The net present value of the Indiana proposal is closest to

Quizplus · Accepted Answer

To find the net present value (NPV) of each proposal, we need to calculate the present value of the expected future cash flows (cash inflows minus cash outflows) using a discount rate of 8%.

For the Indiana proposal, the annual cash inflow is expected to be $500,000 per store for 5 years, so the total cash inflow is $2,500,000. The initial cost is $1,920,000. Using the PVIFA table, the present value of the cash inflows is $3,019,040, and the present value of the cash outflows is $1,920,000. Therefore, the NPV is $3,019,040 - $1,920,000 = $1,099,040.

For the Kentucky proposal, the annual cash inflow is expected to be $600,000 per store for 6 years, so the total cash inflow is $3,600,000. The initial cost is $2,500,000. Using the PVIFA table, the present value of the cash inflows is $4,540,640, and the present value of the cash outflows is $2,500,000. Therefore, the NPV is $4,540,640 - $2,500,000 = $2,040,640.

Comparing the two NPVs, we can see that the Kentucky proposal has a higher NPV of $2,040,640 compared to the Indiana proposal's NPV of $1,099,040. Therefore, O'Mally Department Stores should choose the Kentucky expansion plan.

(Present Value Tables Are Needed