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Managerial Accounting

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Using NPV with Different Investments

MGRACT-BEF2PY

Sassy Wild Company is considering three different options for space for their tattoo parlor. The options are as follows:

Option 1 Option 2 Option 3
Initial Investment \$50,000.00 \$150,000.00 \$250,000.00
Annual Cash Flow \$8,000.00 \$15,000.00 \$25,000.00

Option 1 is to refurbish and remodel the current parlor space for \$50,000 with annual cash flows of \$8,000.

Option 2 is to purchase the neighboring store and remodel it to add more space and facilities for \$150,000, yielding \$15,000 per year.

Option 3 is to purchase a new building to change locations for \$250,000 for \$25,000 in cash flows per year.

If Sassy's hurdle rate is 6% and the cash flows are estimated to occur for 10 years, which option should the company choose using Net Present Value calculations?

A

Option 1

B

Option 2

C

Option 3

D

None of the options should be chosen as they all possess negative net present values.