Question

Singing Fish Fine Foods has ​$1 comma 920 comma 000 for capital investments this year and is considering two potential projects for the funds. Project 1 is updating the​ store's deli section for additional food service. The estimated​ after-tax cash flow of this project is ​$580 comma 000 per year for the next five years. Project 2 is updating the​ store's wine section. The estimated annual​ after-tax cash flow for this project is ​$540 comma 000 for the next six years. If the appropriate discount rate for the deli expansion is 9.7​% and the appropriate discount rate for the wine section is 8.9​%, use the NPV to determine which project Singing Fish should choose for the store. Adjust the NPV for unequal lives with the equivalent annual annuity. Does the decision​ change?

Answer 1

NPV:

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.
FIsh Fine Foods:

Equated NPV of Store's Deli Section:

Year	CF	PVF @9.7%	Disc CF
0	$ -19,20,000.00	1.0000	$ -19,20,000.00
1	$     5,80,000.00	0.9116	$     5,28,714.68
2	$     5,80,000.00	0.8310	$     4,81,964.15
3	$     5,80,000.00	0.7575	$     4,39,347.45
4	$     5,80,000.00	0.6905	$     4,00,499.04
5	$     5,80,000.00	0.6295	$     3,65,085.73
NPV	$     2,95,611.05
PVAF (r%, 5)	3.8200
Equated NPV for each year	$        77,384.71

Equated NPV of Wine Section:

Year	CF	PVF @8.9%	Disc CF
0	$ -19,20,000.00	1.0000	$ -19,20,000.00
1	$     5,40,000.00	0.9183	$     4,95,867.77
2	$     5,40,000.00	0.8432	$     4,55,342.30
3	$     5,40,000.00	0.7743	$     4,18,128.84
4	$     5,40,000.00	0.7110	$     3,83,956.69
5	$     5,40,000.00	0.6529	$     3,52,577.31
6	$     5,40,000.00	0.5996	$     3,23,762.45
NPV	$     5,09,635.36
PVAF (r%, 6)	4.4993
Equated NPV for each year	$     1,13,269.30

Wine section is selected as it has higher equated NPV .

Pls do rate, if the answer is correct and comment, if any further assistance is required.