Use the information below to answer the following question(s).
Williams Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,800,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,400,000. The following information is available:

-The net present value of the Kentucky proposal is closest to

Question

Use the information below to answer the following question(s).
Williams Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,800,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,400,000. The following information is available:
 
-The net present value of the Kentucky 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 future cash flows and subtract the initial investment.

For the Indiana proposal, the present value of the cash flows is:

PV = (400,000 * 5.8 / (1 + 0.06)^1) + (400,000 * 5.8 / (1 + 0.06)^2) + ... + (400,000 * 5.8 / (1 + 0.06)^5)
PV = 1,687,563.68

NPV = PV - Initial Investment = 1,687,563.68 - 1,800,000 = -112,436.32

For the Kentucky proposal, the present value of the cash flows is:

PV = (375,000 * 7.2 / (1 + 0.08)^1) + (375,000 * 7.2 / (1 + 0.08)^2) + ... + (375,000 * 7.2 / (1 + 0.08)^6)
PV = 3,124,283.98

NPV = PV - Initial Investment = 3,124,283.98 - 2,400,000 = 724,283.98

Therefore, the net present value of the Kentucky proposal is $724,283.98, which is closest to answer choice D ($703,380). Therefore, the best choice is to focus on Kentucky and open 6 stores at a cost of $2,400,000.

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