Professor Moneybags has a chance to purchase one of two professional rugby clubs

Question

Professor Moneybags has a chance to purchase one of two professional rugby clubs, the Seattle Serpents or the Trenton Triceratops. At the beginning of last year, the Serpents were purchased for $80 million, provided $8 million in yearly profits, and are currently on sale for $120 million. On the other hand, the Triceratops started the year purchased at $40 million, provided $6.5 million in yearly profits, and are currently on sale for $110 million. Which team would you suggest that Professor Moneybags purchase today, assuming a 6% interest rate? (Assume he cannot depreciate the payroll of the team.)

Explanation / Answer

Seattle Serpents Triceratops cash outflow 80 cash outflow 40 present value@6% present value present value@6% present value profit 8 0.943396 7.54717 profit 6.5 0.943396 6.13207547 sale proceeds 120 0.943396 113.2075 sale proceeds 110 0.943396 103.773585 sum of present value 120.7547 sum of present value 109.90566 cash outflow 80 cash outflow 80 NPV 40.75472 NPV 29.9056604 HE SHOULD PURCHASE SEATTLE SERPENTS AS IT IS HAVING HIGHEST NPV

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