Use the present and future value tables provided in this week’s reading to solve the situations depicted below:
1. Bob’s Music Store is doing well in the area. He has some excess cash in the bank account and is looking at different alternatives that might bring more return than the meager rate his bank is offering. He currently receives 2% interest from his bank, which we will use to determine the net present value of each alternative. He has narrowed it down to two options:
Alternative A: The first option is to upgrade and customize his computer system. The cost will be $3,000. He expects to save $1,800 per year in labor costs as a result of the additional automation. He also believes he will be able to sell any computer hardware for $500 at the end of the 3-year horizon he is looking at before having to upgrade once again.
Alternative B: The second option is to expand his current inventory by offering a new line of guitars. The initial outlay of the expansion is $8,0
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