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 $1,600,000 with cash flows over the next six years of $180,000 (year one), $290,000 (year two), $270,000 (years three through five), and $1,760,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: an initial cost of $2,430,000 with cash flows over the next four years of $440,000 (years one through three) and $3,050,000 (year four), at which point Grady plans to sell the facility. If the appropriate discount rate for the restaurant is 10.0% and the appropriate discount rate for the sports facility is 12.0%, 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?

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 $1,600,000 with cash flows over the next six years of $180,000 (year one), $290,000 (year two), $270,000 (years three through five), and $1,760,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: an initial cost of $2,430,000 with cash flows over the next four years of $440,000 (years one through three) and $3,050,000 (year four), at which point Grady plans to sell the facility. If the appropriate discount rate for the restaurant is 10.0% and the appropriate discount rate for the sports facility is 12.0%, 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?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 17P: The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will...

See similar textbooks

Similar questions

Manny Carson, certified management accountant and controller of Wakeman Enterprises, has been given permission to acquire a new computer and software for the companys accounting system. The capital investment analysis showed an NPV of 100,000. However, the initial estimates of acquisition and installation costs were made on the basis of tentative costs without any formal bids. Manny now has two formal bids, one that would allow the firm to meet or beat the original projected NPV and one that would reduce the projected NPV by 50,000. The second bid involves a system that would increase both the initial cost and the operating cost. Normally, Manny would take the first bid without hesitation. However, Todd Downing, the owner of the firm presenting the second bid, is a close friend. Manny called Todd and explained the situation, offering Todd an opportunity to alter his bid and win the job. Todd thanked Manny and then made a counteroffer. Todd: Listen, Manny, this job at the original price is the key to a successful year for me. The revenues will help me gain approval for the loan I need for renovation and expansion. If I dont get that loan, I see hard times ahead. The financial stats for loan approval are so marginal that reducing the bid price may blow my chances. Manny: Losing the bid altogether would be even worse, dont you think? Todd: True. However, if you award me the job, Ill be able to add personnel. I know that your son is looking for a job, and I can offer him a good salary and a promising future. Additionally, Ill be able to take you and your wife on that vacation to Hawaii that weve been talking about. Manny: Well, you have a point. My son is having an awful time finding a job, and he has a wife and three kids to support. My wife is tired of having them live with us. She and I could use a vacation. I doubt that the other bidder would make any fuss if we turned it down. Its offices are out of state, after all. Todd: Out of state? All the more reason to turn it down. Given the states economy, it seems almost criminal to take business outside. Those are the kind of business decisions that cause problems for people like your son. Required: Evaluate the ethical behavior of Manny. Should Manny have called Todd in the first place? Would there have been any problems if Todd had agreed to meet the lower bid price? Identify the parts of the Statement of Ethical Professional Practice (Chapter 1) that Manny may be violating, if any.
Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Postman Company is considering two independent projects. One project involves a new product line, and the other involves the acquisition of forklifts for the Materials Handling Department. The projected annual operating revenues and expenses are as follows: Required: Compute the after-tax cash flows of each project. The tax rate is 40 percent and includes federal and state assessments.
MIRR 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 $1,460,000 with cash flows over the next six years of $240,000 (year one), $300,000 (year two), $270,000 (years three through five), and $1,780,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: initial cost of $2,360,000 with cash flows over the next four years of $390,000 (years one through three) and $2,650,000 (year four), at which point Grady plans to sell the facility. The appropriate discount rate for the restaurant is 10.0% and the appropriate discount rate for the sports facility is 12.0%. What are the MIRRs for the Grady Enterprises projects? What are the MIRRs when you adjust for the unequal lives? Do the MIRR adjusted for…
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…
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 $1,500,000 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. Adjust the NPV for unequal lives with the equivalent…