The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now but will generate $100,000 in profit next year. In one year, the owner will sell the restaurant for $350,000.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now but will generate $75,000 in profit at the end of the year. In one year, the owner will sell the restaurant for $350,000.
a) If the interest rate is 7%, what is the NPV of alternative #1?
b) If the interest rate is 7%, what is the NPV of alternative #2?
c) If the interest rate is 7%, what is the NPV of alternative #3?
d) If the interest rate is 7%, what is the alternative with the highest NPV, and what is its NPV?
e) If the interest rate is 7%, what is the alternative with the lowest NPV, and what is its NPV?