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ashly138 ashly138
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Posts: 686
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6 years ago
Retail Outlet is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location which includes considerations for the time value of money. The information is as follows:

   Location A   Location B   Location C
Internal rate of return    13%   17%   20%
Net present value   $25,000   $40,000   $20,000

The owner does not understand how the location with the highest percentage return has the lowest net present value.

Required:
Explain to the owner the probable cause(s) of the comparable differences.
Textbook 
Cost Accounting: A Managerial Emphasis, Canadian Edition

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
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6 years ago
Location C may have a much lower initial investment than the other two. Therefore, it could show a higher rate of return with fewer dollars of inflow. Unfortunately, this may cause it to have the lowest net present value since this model is presented in dollar terms. Location C could also have a shorter life which could give it a higher percentage return during its life but fewer dollars overall.
Without mathematics, there's nothing you can do. Everything around you is mathematics. Everything around you is numbers.
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