Question

The investment committee of Granny’s Restaurants Inc. is evaluating two restaurant sites. The sites have different useful lives, but each requires an investment of $1,200,000. The estimated net cash flows from each site are as follows:

 

Net Cash Flows

Year

Helena

Butte

1

$375,000

$500,000

2

$375,000

$500,000

3

$375,000

$500,000

4

$375,000

$500,000

5

$375,000

 

6

$375,000

 

                                                               

The committee has selected a rate of 20% for purposes of net present value analysis. It also estimates that the residual value at the end of each restaurant’s useful life is $0, but at the end of the fourth year, Helena’s residual value would be $500,000.                                                                                       

Instructions:  Using formulas/functions wherever available, complete the following on the Input tab…

  1. For each site, compute the net present value, using the Present Value of an Annuity table.  Ignore the unequal lives of the projects.            

  2. For each site, compute the net present value, assuming that Helena is adjusted to a four-year life for purposes of analysis.  For this use the Present Value of $1 table.       

  3. Having completed the analysis above, provide a brief recap of what you found in your analysis.  Include in the recap, did the results show each project to be positive? Negative?  And if Granny's can only do one project, which one should be done and why?

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