Question

NPV unequal lives: Singing Fish Fine Foods has $1,880,000 for capital investments this year and is considering two potential projects for the funds. Project 1 is updating the store's deli section for additional food service. The estimated​ after-tax cash flow of this project is ​$560,000 per year for the next five years. Project 2 is updating the​ store's wine section. The estimated annual​ after-tax cash flow for this project is $500,000 for the next six years. If the appropriate discount rate for the deli expansion is 9.4% and the appropriate discount rate for the wine section is 8.9%,use the NPV to determine which project Singing Fish should choose for the store. Adjust the NPV for unequal lives with the equivalent annual annuity. Does the decision​ change?

If the appropriate discount rate for the deli expansion is 9.4​%, what is the NPV of the deli​ expansion?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

А в C D Year 30 4 1 52 6 3 7 4 Deli section -$1,880,000.00 $560,000.00 $560,000.00 $560,000.00 $560,000.00 $560,000.00 Wine section -$1,880,000.00 $500,000.00 $500,000.00 $500,000.00 $500,000.00 $500,000.00 $500,000.00 8.90% $369,662.37 $82,159.52 Discount rate NPV Equivalent Annual annuity(EAA) 9.40% $275,784.27 $71,639.45 Decision Update Wine section Update Wine section No, decision does not change. 17

Cell reference -

А B Year Deli section 3 1 2 3 4 5 -1880000 560000 560000 560000 560000 560000 Wine section -1880000 500000 500000 500000 500000 500000 500000 0.089 =D3+NPV(D10,04:D9) =D11/PV(D10,6,-1,,0) 10 11 Discount rate 0.094 NPV =C3+NPV(C10,04:08) Equivalent Annual annuity(EAA) =C11/PV(C10,5,-1,,0) Decision Update Wine section Update Wine section 12 No, decision does not change.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.