Question

The investment committee of Auntie M’s Restaurants Inc. is evaluating two restaurant sites. The sites have different useful lives, but each requires an investment of $ 900,000. The estimated net cash flows from each site are as follows:


The committee has selected a rate of 20% for purposes of net present value analysis. It also estimates that the residual value at the end of each restaurant’s useful life is $ 0; but at the end of the fourth year, Witchita’s residual value would be $ 500,000.

Instructions
1. For each site, compute the net present value. Use the present value of an annuity of $ 1 table appearing in this chapter (Exhibit 2). (Ignore the unequal lives of the projects.)
2. For each site, compute the net present value, assuming that Witchita is adjusted to a four-year life for purposes of analysis. Use the present value of $ 1 table appearing in this chapter (Exhibit 1).
3. Prepare a report to the investment committee, providing your advice on the relative merits of the twosites.


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  • CreatedJune 27, 2014
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