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7 February, 22:08

The owners of a chain of fast-food restaurants spend $ 25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $ 10 million per year for the next five years. If the discount rate is 6 %, were the owners correct in making the decision to install donut makers?

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  1. 7 February, 23:35
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    yes as it net present value is $24.17 million

    Explanation:

    In this question we have to find out the net present value which is shown below

    (In millions) (In millions)

    Year Cash flows Discount rate 6% PV of cash inflows

    0 - $25 1 - $25 (A)

    1 $10 0.9434 $9.43

    2 $10 0.8900 $8.90

    3 $10 0.8396 $8.40

    4 $10 0.7921 $7.92

    5 $10 0.7473 $7.47

    6 $10 0.7050 $7.05

    Present value $49.17 (B)

    Net present value $24.17 (A - B)

    As we can see that the net present value comes in positive which means it generated the return in near future so the decision should be yes
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