Question

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?

Answer 1

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.