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Alternative Capital Investments

The investment committee of Auntie M$\text{'}$s Restaurants Inc. is evaluating two restaurant sites. The sites have different useful lives, but each requires an investment of $$900,000.$ The estimated net cash flows from each site are as follows:

Net Cash Flows

Year Wichita Topeka

$1$ $$310,000$ $$400,000$

$2310,000400,000$

$3310,000400,000$

$4310,000400,000$

$5310,000$

$6310,000$

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, Wichita$$s residual value would be $$500,000.$

Present Value of $$1$ at Compound Interest

Year $6\%10\%12\%15\%20\%$

$10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}833$

$20\mathrm{.}8900\mathrm{.}8260\mathrm{.}7970\mathrm{.}7560\mathrm{.}694$

$30\mathrm{.}8400\mathrm{.}7510\mathrm{.}7120\mathrm{.}6580\mathrm{.}579$

$40\mathrm{.}7920\mathrm{.}6830\mathrm{.}6360\mathrm{.}5720\mathrm{.}482$

$50\mathrm{.}7470\mathrm{.}6210\mathrm{.}5670\mathrm{.}4970\mathrm{.}402$

$60\mathrm{.}7050\mathrm{.}5640\mathrm{.}5070\mathrm{.}4320\mathrm{.}335$

$70\mathrm{.}6650\mathrm{.}5130\mathrm{.}4520\mathrm{.}3760\mathrm{.}279$

$80\mathrm{.}6270\mathrm{.}4670\mathrm{.}4040\mathrm{.}3270\mathrm{.}233$

$90\mathrm{.}5920\mathrm{.}4240\mathrm{.}3610\mathrm{.}2840\mathrm{.}194$

$100\mathrm{.}5580\mathrm{.}3860\mathrm{.}3220\mathrm{.}2470\mathrm{.}162$

Present Value of an Annuity of $$1$ at Compound Interest

Year $6\%10\%12\%15\%20\%$

$10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}833$

$21\mathrm{.}8331\mathrm{.}7361\mathrm{.}6901\mathrm{.}6261\mathrm{.}528$

$32\mathrm{.}6732\mathrm{.}4872\mathrm{.}4022\mathrm{.}2832\mathrm{.}106$

$43\mathrm{.}4653\mathrm{.}1703\mathrm{.}0372\mathrm{.}8552\mathrm{.}589$

$54\mathrm{.}2123\mathrm{.}7913\mathrm{.}6053\mathrm{.}3532\mathrm{.}991$

$64\mathrm{.}9174\mathrm{.}3554\mathrm{.}1113\mathrm{.}7853\mathrm{.}326$

$75\mathrm{.}5824\mathrm{.}8684\mathrm{.}5644\mathrm{.}1603\mathrm{.}605$

$86\mathrm{.}2105\mathrm{.}3354\mathrm{.}9684\mathrm{.}4873\mathrm{.}837$

$96\mathrm{.}8025\mathrm{.}7595\mathrm{.}3284\mathrm{.}7724\mathrm{.}031$

$107\mathrm{.}3606\mathrm{.}1455\mathrm{.}6505\mathrm{.}0194\mathrm{.}192$

Required:

$1.$ For each site, compute the net present value. Use the present value of an annuity of $$1$ table above. Ignore the unequal lives of the projects. If required, round to the nearest dollar.

Wichita, Topeka:

Present value of annual net cash flows:

Amount to be invested:

Net present value:

$2.$ For each site, compute the net present value, assuming that Wichita is adjusted to a four$-$year life for purposes of analysis. Use the present value of $$1$ table above. If required, round to the nearest dollar.

Wichita, Topeka:

Present value of annual cash flows:

Amount to be invested:

Net present value:

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