Asked by Shawn Killens on Jul 12, 2024
Verified
Jack's Lock and Key is considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect after then. If the interest rate is 5%, should Jack's remodel? Defend your answer by showing your work.
Interest Rate
The percent of principal charged by the lender for the use of its money or the rate earned on deposited funds.
Revenues
Revenues are the total amount of money generated by a company from its business activities, such as the sale of goods or services, before any costs or expenses are deducted.
- Analyze investment opportunities through the utilization of net present value (NPV) and internal rate of return (IRR) methodologies.
- Assess and determine the financial returns of investments under diverse interest rates.
Verified Answer
DN
Dharshini NelamaganJul 17, 2024
Final Answer :
Jack's should remodel. The present value of the remodeling exceeds the cost. The present value = $3,000/(1.05) + $2,500/(1.05)2 + $1,500/(1.05)3 = $2857.14 + $2267.57 + $1295.76 = $6420.47.
Learning Objectives
- Analyze investment opportunities through the utilization of net present value (NPV) and internal rate of return (IRR) methodologies.
- Assess and determine the financial returns of investments under diverse interest rates.