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 project cash flow of the restaurant is an initial cost of $1,500,000 with cash flows over the next six years of $200,000 (year one), $250,000 (year two), $300,000 (years three through five), and $1,750,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: an initial cost of $2,400,000 with cash flows over the next four years of $400,000 ( years one through three) and $3,000,000 (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 13.0%, use the NPV to determine which project Grady should choose for the parcel of land. (Find the NPV for both the restaurant and the sports facility). Adjust the NPV for unequal lives with the equivalent annual annuity for both projects. Based on the adjusted NPV which project should be chosen. Does the decision change?
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 project cash flow of the restaurant is an initial cost of $1,500,000 with cash flows over the next six years of $200,000 (year one), $250,000 (year two), $300,000 (years three through five), and $1,750,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: an initial cost of $2,400,000 with cash flows over the next four years of $400,000 ( years one through three) and $3,000,000 (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 13.0%, use the NPV to determine which project Grady should choose for the parcel of land. (Find the NPV for both the restaurant and the sports facility). Adjust the NPV for unequal lives with the equivalent annual annuity for both projects. Based on the adjusted NPV which project should be chosen. Does the decision change?
Chapter11: Long-term Assets
Section: Chapter Questions
Problem 7PB: Tree Lovers Inc. purchased 2,500 acres of woodland in which it intends to harvest the complete...
Related questions
Concept explainers
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Topic Video
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 project cash flow of the restaurant is an initial cost of $1,500,000 with cash flows over the next six years of $200,000 (year one), $250,000 (year two), $300,000 (years three through five), and $1,750,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: an initial cost of $2,400,000 with cash flows over the next four years of $400,000 ( years one through three) and $3,000,000 (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 13.0%, use the NPV to determine which project Grady should choose for the parcel of land. (Find the NPV for both the restaurant and the sports facility). Adjust the NPV for unequal lives with the equivalent annual annuity for both projects. Based on the adjusted NPV which project should be chosen. Does the decision change?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Accounting Volume 1
Accounting
ISBN:
9781947172685
Author:
OpenStax
Publisher:
OpenStax College
Principles of Accounting Volume 1
Accounting
ISBN:
9781947172685
Author:
OpenStax
Publisher:
OpenStax College
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning