The owner of Zivanovs Pancake House is considering an expansion of the business. H e has identified

The owner of Zivanov’s Pancake House is considering an expansion of the business. H e has identified two alternatives, as follows:

• Build a new restaurant near the mall.

• Buy and renovate an old building downtown for the new restaurant.

The projected cash flows from these two alternatives are shown below. The owner of the restaurant uses a 10 percent after-tax discount rate.

*Includes after-tax cash flows from all sources, including incremental revenue, incremental expenses, and depreciation tax shield.

Required:
1. Compute the net present value of each alternative restaurant site.
2. Compute the profitability index for each alternative.
3. How do the two sites rank in terms of
(a) NPV
(b) The profitability index?
4. Comment on the difficulty of ranking the owner’s two options for the new restaurantsite.

Transcribed Image Text:

Net After-Tax Cash Inflows Investment Proposal Mall restaurant Cash Outflow: Time 0 $400,000 200,000 Years 1-10 $50,000 35,800 Years 11-20 $50,000