Question

1. Bernie’s Restaurants is considering two mutually exclusive projects having the cash flow streams shown in the table below.

1. Compute the net present value (NPV) for both projects using a 15% required rate of return.

2. Compute the internal rate of return (IRR) for both projects.

3. Compute the profitability index for both projects.

4. Which project should Bernie’s business accept and why?

Bernie’s Restaurants Capital Budgeting Projects
Year	Project A Net Cash Flow	Project B Net Cash Flow
0	-$ 90,000	-$100,000
1	$ 40,000	$ 30,000
2	$ 40,000	$ 50,000
3	$ 40,000	$ 25,000
4	$ 40,000	$ 55,000

Answer 1

Project A Iyear Project B year Cash flows pv@15% Present value $ (90,000.00) 1.0000 $ 90,000.00) $ 40,000.00 0.8696 $ 34,782.61 $ 40,000.00 0.7561 $ 30,245.75 $ 40,000.00 0.6575 $ 26,300.65 $ 40,000.00 0.5718 $ 27.77% NPV $ 24,199.13 Cash flows pv@15% Present value $(1,00,000.00) 1.0000 $ (1,00,000.00) $ 30,000.00 0.8696 $ 26,086.96 $ 50,000.00 0.7561 $ 37,807.18 $ 25,000.00 0.6575 $ 16,437.91 $ 55,000.00 0.5718 $ 31,446.43 20.35% NPV $ 11,778.47 IRR IRR Profitability Index Profitability Index 1+(NPV/Initial investment) 1+24199.13/90000) $1.27 1+NPV/Initial investment) 1+(11778.47/100000) $ 1.12 Select Project A because the profitability index and NPV and IRR for the project A is Higher