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 $1,420,000with cash flows over the next six years of ​$190,000 ​(year one), ​$200,000 ​(year two), $310,000 ​(years three through​ five), and ​$1,800,000 ​(year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash​ flows: an initial cost of ​$2,330,000 with cash flows over the next four years of ​$350,000 ​(years one through​ three) and $2,530,000 ​(year four), at which point Grady plans to sell the facility. If the appropriate discount rate for the restaurant is 9.59.5​% and the appropriate discount rate for the sports facility is 11.511.5​%, 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?

1. If the appropriate discount rate for the restaurant is 9.5%, what is the NPV of the restaurant​ project?

2. If the appropriate discount rate for the sports facility is 11.5%, what is the NPV of the sports​ facility?

3. Based on the​ NPV, Grady should pick the ______

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

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

6. Based on the adjusted​ NPV, Grady should pick the ______

7. Does the decision​ change?

Answer 1

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