This business/management problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
ScanSolve AI Answer
To solve this problem, we need to calculate the Net Present Value (NPV) for each business venture. The annual market rate of interest is cut off in the image, so we will assume an annual market interest rate of 10%. We will also assume that the tailoring outfit's yield is realized after 2 years, similar to the shoe-making venture, for a fair comparison. The formula for Net Present Value (NPV) is: NPV = (FV)/((1+r)^n) - C_0 Where: FV = Future Value (yield) r = Annual market interest rate n = Number of years C_0 = Initial Capital (investment) Step 1: State assumptions for missing information. We assume the annual market rate of interest is 10\% (r = 0.10). We assume the tailoring outfit also yields after 2 years (n = 2), consistent with the shoe-making venture. Step 2: Calculate the NPV for the Tailoring Outfit venture. Initial Capital (C_0): ₦250,000 Future Value (FV): ₦350,000 Number of years (n): 2 Interest rate (r): 0.10 First, calculate the present value of the yield: PV_yield, tailoring = (350000)/((1+0.10)^2) = (350000)/((1.10)^2) = (350000)/(1.21) ≈ 289256.20 Now, calculate the NPV: NPV_tailoring = PV_yield, tailoring - C_0 = 289256.20 - 250000 = 39256.20 Step 3: Calculate the NPV for the Shoe Making venture. Initial Capital (C_0): ₦450,000 Future Value (FV): ₦550,000 Number of years (n): 2 Interest rate (r): 0.10 First, calculate the present value of the yield: PV_yield, shoe = (550000)/((1+0.10)^2) = (550000)/((1.10)^2) = (550000)/(1.21) ≈ 454545.45 Now, calculate the NPV: NPV_shoe = PV_yield, shoe - C_0 = 454545.45 - 450000 = 4545.45 Step 4: Compare the NPVs and provide advice. NPV for Tailoring Outfit: ₦39,256.20 NPV for Shoe Making: ₦4,545.45 Both projects have a positive NPV, indicating they are potentially profitable. However, the Tailoring Outfit venture has a significantly higher NPV. Therefore, Okeke's company should choose the project with the higher NPV. The company should invest in the Tailoring Outfit venture. The NPV for the Tailoring Outfit is ₦39,256.20. The NPV for the Shoe Making is ₦4,545.45. 3 done, 2 left today. You're making progress.