Question

Sehaba Agro Industry Company intends to open a branch either in Goba or Jijiga. Opening of both branches cost Br. 135,000 each and the expected cash inflows from each branch over the next ten years is Br. 25,000 per year. however, the required rates of return are 9% and 10% respectively for goba and jijiga respectively.

Answer 1

Their wealth maximization is Br.47500

Given the following

• Opening cost for both branches = Br. 135,000

If the expected cash inflows from each branch over the next ten years is Br. 25,000 per year, thee return after 10 years for each branch will be:

• Inflow  = 10 * 25000
• Inflow = Br. 250,000

If the rate of return is 9% and 10% respectively for Goba and Jijiga respectively, then;

Return for Goba = 0.09 * 250000

Return for Goba = Br.22,500

Return for Jigija = 0.10 * 250000

Return for Jigija = Br. 25000

Wealth Maximization  = Br.22,500 + Br.25,000

Wealth Maximization = Br.47,500

Hence their wealth maximization is Br.47500

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