Sami is considering adding toys to her general store. She hired Aaron, to do an analysis of the project andpaid him$500last month. Aaron estimated that the initial investment for this new toy line will be$85,000.Toy sales are expected to produce after tax cash flows of$15,000 per yearover the nexttenyears.Samihas determined her cost of capital is7%.

a)Based on NPV analysis, should Sami add toys to her general store?

b) Shelf space in the general store is quite limited and Sami is considering adding a line of petsuppliesinsteadof toys. She has asked Aaron to make a recommendation on which product lineshe should choose. Aaron remembers from his Finance class that the goal is to maximize the valueof the company. Aaron has determined the following:IRR of the toy product line:11.93%NPV of the pet supply product line:$10,000IRR of the pet supply product line:12.5%

What product line should Aaron recommend? Explain.

 

Answer rating: 100% (QA)

a Based on NPV analysis should Sami add toys to her general store The NPV of the toy product line is ... View the full answer