Suppose a firm has two business options to choose from and has asked you, a Business Mathematics student, to help it make a decision. Option "A" requires an immediate cost of

$20,000

along with "upgrade costs" of

$15,000

in year 3 and

$17,500

in year 6. The returns from these investments begin in year 2 and are estimated to be

$11,000

per year for 3 years,

$14,000

per year for the next 3 years, and then

$19,000

in years 8 and 9, respectively. The only return in year 10 is a residual value of

$4,000.

Option "B" requires a cost today and in years 1 and 2 of

$21,000

and has estimated returns beginning in year 4 and ending in year 10 of

$17,000

per year. There will also be a residual value of

$13,000

in year 10. Find the NPV (Net Present Value) for each of the two options available to the business based on the information given. Assume the business's required return on investment

the value of money or discount rate

is

16

percent. Explain which, if either, of these two options you would recommend to the business and why.

Question content area bottom

Part 1

The net present value of option A is

$enter your response here.

(Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.)

Part 2

The net present value of option B is

$enter your response here.

(Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.)

Part 3

Neither option

Option A

Option B

should be recommended to the business because

both NPVs are positive.

its NPV is smaller than the other option.

both NPVs are negative.

its NPV is larger than the other option.