Singing Fish Fine Foods has $1,910,000 for capital investments this year and is considering two potential...

Singing Fish Fine Foods has $1,910,000 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 $610,000 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 $530,000 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 9.1%, 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? If the appropriate discount rate for the deli expansion is 9.7%, what is the NPV of the deli expansion? If the appropriate discount rate for the deli expansion is 9.1%, what is the NPV of the deli expansion?

Expert Solution

NPV of both project at specified discount rate is calculated in excel and screen shot provided below:

NPV of deli Section is $420,211.62 and NPV of wine section is $460,464.98.

Based on NPV decision, Singing Fish should choose Wine section for investment. because NPV of Wine sectionis higher than NPV of Deli Section.

Life of Deli section is 5 year and life of Wine section is 6 year. So to we calculate NPV of wine section or five year only (equal to Deli Section life). then NPV of both project is calculated in excel and screen shot provided below:

after adjusting unequal life, NPV of deli Section is $420,211.62 and NPV of wine section is $146,177.30.

Based on NPV decision, Singing Fish should choose deli section for investment. because NPV of deli sectionis higher than NPV of Deli Section. So decision has chnaged.

f the appropriate discount rate for the deli expansion is 9.7?%, then NPV of Delis section is $420,211.62 and if f the appropriate discount rate for the deli expansion is 9.10?%, then NPV of deli section is calculated below:

If the appropriate discount rate for the deli expansion is 9.1%, then NPV is $456,543.68.

jeff jeffy answered 2 years ago

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