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What is the NPV if KFC expected profit in Period 1 is S15,000, and their profit in Period 0 is $20,800 ? (Discount rate is 20% )

A) $5,800
B) $35,800
C) $12,500
D) $33,300
E) $8,300

1 Answer

1 vote

Final answer:

The NPV of KFC with the expected profit of $15,000 in Period 1 and $20,800 in Period 0, using a discount rate of 20%, is $33,300. This calculation includes discounting the Period 1 profits back to present value and adding it to the Period 0 profit which is already in present terms.

Step-by-step explanation:

The question involves the calculation of Net Present Value (NPV) for expected profits of a popular fast-food company, KFC. To calculate the NPV, we need to discount the future profits back to their present value using the given discount rate. The discount rate provided is 20%, and we have profits for two periods, $20,800 for Period 0 and $15,000 for Period 1. The profit of Period 0 does not need to be discounted as it is already in present terms. The profit for Period 1 needs to be discounted back to the present value.

Now let's calculate the present value (PV) of the profit for Period 1:

PV$15,000 in Period 1 = $15,000 / (1 + 0.20)ยน = $12,500.

Since the profit in Period 0 is already in present value terms, we add the two together:

NPV = PV Period 0 profit + PV Period 1 profit

= $20,800 + $12,500

= $33,300.

The correct answer to the question, 'What is the NPV if KFC expected profit in Period 1 is $15,000, and their profit in Period 0 is $20,800?', is $33,300, which corresponds to option (D).

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