The owner of Lobsters Lair is considering selling his restaurant and retiring. An investor has offered to buy Lobsters Lair for $350,000 whenever the owner is ready to retire. The owner is considering the following three options: Option 1: Sell the restaurant now and retire. Option 2: Hire someone to manage the restaurant for the next year and then retire. This will require the owner to spend $40,000 now but will generate $100,000 in additional net cash flow at end of the year. At the end of one year, the owner will sell the restaurant. Option 3: Scale back the restaurants hours and ease into retirement over the next year. This will require the owner to spend $40,000 now but will generate $75,000 additional next cash flow at the end of the year. At the end of one year, the owner will sell the restaurant. The discount rate is 15% per annum.

1. What is the NPV of option 1? Show all calculations.

2. What is the NPV of option 2? Show all calculations.

3. What is the NPV of option 3. Show all calculations.

4. Which of the three options should the restaurant owner choose and why? Explain.

5. If the restaurant had $100,000 in fixed assets that could be depreciated on a straight line basis at 25% per annum and the tax rate is positive, would your answer to part 6.4 change, and how? Explain. (Note: You do not have to redo the calculations in parts 6.1 6.3 to answer this part.)