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The investment committee of Iron Skillet Restaurants Inc is evaluating

The investment committee of Iron Skillet Restaurants Inc. is evaluating two restaurant sites. The sites have different useful lives, but each requires an investment of $1,000,000. 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, Site A’s residual value would be $300,000.

Instruction

1. For each site, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter. (Ignore the unequal lives of the projects.)

2. For each site, compute the net present value, assuming that Site A is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table appearing in this chapter.

3. Prepare a report to the investment committee, providing your advice on the relative merits of the twosites.

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, Site A’s residual value would be $300,000.

Instruction

1. For each site, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter. (Ignore the unequal lives of the projects.)

2. For each site, compute the net present value, assuming that Site A is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table appearing in this chapter.

3. Prepare a report to the investment committee, providing your advice on the relative merits of the twosites.

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