A chain of take-away pizza stores is considering introducing a new line of gluten-free pizzas.  Net revenue from the new line of pizzas is expected to total $500,000 per year, but 15% of this net revenue is forecast to consist of people switching from the regular pizzas to the gluten-free pizzas. How would you describe this situation in terms of the NPV analysis upon which the situation will be based. Question 1Answer a. There is a negative externality equal to $425,000 which should be included in the NPV analysis for the gluten-free pizza project. b. There is a positive externality equal to $425,000 which should be included in the NPV analysis for the gluten-free pizza project. c. There is a positive externality equal to $75,000 which should be included in the NPV analysis for the gluten-free pizza project. d. There is a negative externality equal to $75,000 which should be included in the NPV analysis for the gluten-free pizza project.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 13P
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A chain of take-away pizza stores is considering introducing a new line of gluten-free pizzas.  Net revenue from the new line of pizzas is expected to total $500,000 per year, but 15% of this net revenue is forecast to consist of people switching from the regular pizzas to the gluten-free pizzas.

How would you describe this situation in terms of the NPV analysis upon which the situation will be based.

Question 1Answer

a.
There is a negative externality equal to $425,000 which should be included in the NPV analysis for the gluten-free pizza project.
b.
There is a positive externality equal to $425,000 which should be included in the NPV analysis for the gluten-free pizza project.
c.
There is a positive externality equal to $75,000 which should be included in the NPV analysis for the gluten-free pizza project.
d.
There is a negative externality equal to $75,000 which should be included in the NPV analysis for the gluten-free pizza project.
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