Question
NPV unequal lives. Grady Enterprises is looking at two project opportunities for a parcel of land the company currently owns. The first project is a restaurant, and the second project is a sports facility. The projected cash flow of the restaurant is an initial cost of $1,540,000 with cash flows over the next six years of $210,000 (year one), $220,000 (year two), $330,000 (years three through five), and $1,780,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: initial cost of $2,380,000 with cash flows over the next four years of $350,000 (years one through three) and $3,060,000 (year four), at which point Grady plans to sell the facility. If the appropriate discount rate for the restaurant is 10.0% and the appropriate discount rate for the sports facility is 120% use the NPV to determine which project Grady should choose for the parcel of land. Adjust the NPV for unequal lives with the equivalent annual annuity. Does the decision change? If the appropriate discount rate for the restaurant is 10.0%, what is the NPV of the restaurant project? S(Round to the nearest cent.) (Round to the nearest If the appropriate discount rate for the sports facility is 12.0%, what is the NPV of the sports facility? S (Round to the nearest cent.) Based on the NPV, Grady should pick the What is the adjusted NPV equivalent annual annuity of the restaurant project? project. (Select from the drop-down menu. (Round to the nearest cent) What is the adjusted NPV equivalent annual annuity of the sports facility? Enter your answer in each of the answer boxes. 6
Explanation / Answer
Calculation of NPV of restaurant and sports facility -
If the appropriate discount rate is 10% for restaurant NPV of the project would be $ 515723.2
If the appropriate discount rate is 12% for sports facility NPV of the project would be $ 405326.3
Based on NPV brady should pick the restaurant option as it has higher NPV.
Adjusted NPV equivalent annual annuity of the restaurant project = 515723.2 /6
= 85953.87
Adjusted NPV equivalent annual annuity of the sports facility project = 405326.3 / 4 = $ 101331.6
Please note all values are in $.
In case of any clarification required please comment.
Year 0 1 2 3 4 5 6 NPV Initial cost of restaurant -1540000 210000 220000 330000 330000 330000 1780000 Discouting @10% 1 0.909091 0.826446 0.751315 0.683013 0.620921 0.564474 PV -1540000 190909.1 181818.2 247933.9 225394.4 204904 1004764 515723.2 Year 0 1 2 3 4 NPV Initial cost of restaurant -2380000 350000 350000 350000 3060000 Discouting @12% 1 0.892857 0.797194 0.71178 0.635518 PV -2380000 312500 279017.9 249123.1 1944685 405326.3
