Jack's Lock and Key is considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect after then. If the interest rate is 5%, should Jack's remodel? Defend your answer by showing your work
Jack's should remodel. The present value of the remodeling exceeds the cost. The present value = $3,000/(1.05) + $2,500/(1.05)2 + $1,500/(1.05)3 = $2857.14 + $2267.57 + $1295.76 = $6420.47.
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