Question

NPV unequal lives. Grady Enterprises is looking at two project opportunities for a parcel of land the company currently owns. The first project is a​ restaurant, and the second project is a sports facility. The projected cash flow of the restaurant is an initial cost of $ 1 comma 540 comma 000 with cash flows over the next six years of ​$160 comma 000 ​(year one), ​$230 comma 000 ​(year two), $ 320 comma 000 ​(years three through​ five), and ​$1 comma 750 comma 000 ​(year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash​ flows: an initial cost of ​$2 comma 480 comma 000 with cash flows over the next four years of ​$430 comma 000 ​(years one through​ three) and $ 2 comma 670 comma 000 ​(year four), at which point Grady plans to sell the facility. If the appropriate discount rate for the restaurant is 11.0​% and the appropriate discount rate for the sports facility is 12.5​%, use the NPV to determine which project Grady should choose for the parcel of land. Adjust the NPV for unequal lives with the equivalent annual annuity. Does the decision​ change?

If the appropriate discount rate for the restaurant is

11.011.0​%,

what is the NPV of the restaurant​ project?

​$nothing  

​(Round to the nearest​ cent.)If the appropriate discount rate for the sports facility is

12.5 %12.5%​,

what is the NPV of the sports​ facility?

​$nothing  

​(Round to the nearest​ cent.)Based on the​ NPV, Grady should pick the

▼

restaurant

sports facility

project.  ​(Select from the​ drop-down menu.)

What is the adjusted NPV equivalent annual annuity of the restaurant​ project?

​$nothing  

​(Round to the nearest​ cent.)

What is the adjusted NPV equivalent annual annuity of the sports​ facility?

​$nothing  

​(Round to the nearest​ cent.)Based on the adjusted​ NPV, Grady should pick the

restaurant

project.  ​(Select from the​ drop-down menu.)Does the decision​ change?

▼

Yes

No

  ​(Select from the​ drop-down menu.)

Enter your answer in each of the answer boxes.

Answer 1

RESTAURANT PROJECT:
Year	Cash flow	PVIF at 11.0%	PV at 11.0%
0	-1540000	1	$-15,40,000.00
1	160000	0.90090	$    1,44,144.14
2	230000	0.81162	$    1,86,673.16
3	320000	0.73119	$    2,33,981.24
4	320000	0.65873	$    2,10,793.91
5	320000	0.59345	$    1,89,904.42
6	1750000	0.53464	$    9,35,621.46
		4.23054
	NPV OF THE PROJECT	$    3,61,118.35
SPORTS FACILITY PROJECT:
Year	Cash flow	PVIF at 12.5%	PV at 12.5%
0	-2480000	1	$-24,80,000.00
1	430000	0.88889	$    3,82,222.22
2	430000	0.79012	$    3,39,753.09
3	430000	0.70233	$    3,02,002.74
4	2670000	0.62430	$ 16,66,867.86
		3.00564
	NPV OF THE PROJECT	$    2,10,845.91
As the Restaurant Project has higher NPV,
it should be selected.

EQUIVALENT ANNUAL ANNUITY:
= NPV/PVIFA(r,n)
EAA OF RESTAURANT PROJECT:
=361118.35/4.23054	85,359.91
EAA OF SPORTS FACILITY PROJECT:
=210845.91/3.00564	70,150.10

As the EAA of the Restaurant project is higher it should

Hence, the decision is the same; it does not change.