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The investment committee of Auntie M’s Restaurants

The investment committee of Auntie M’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 2 310,000 400,000 3 310,000 400,000 4 310,000 400,000 5 310,000 6 310,000 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 Year6%10%12%15%20% 10.9430.9090.8930.8700.833 20.8900.8260.7970.7560.694 30.8400.7510.7120.6580.579 40.7920.6830.6360.5720.482 50.7470.6210.5670.4970.402 60.7050.5640.5070.4320.335 70.6650.5130.4520.3760.279 80.6270.4670.4040.3270.233 90.5920.4240.3610.2840.194 100.5580.3860.3220.2470.162 Required: 1. For each site, compute the net present value. Use the The sum of the present values of a series of equal cash flows to be received at fixed intervals.present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If required, round to the nearest dollar. WichitaTopeka Present value of annual net cash flows$$ Less amount to be invested$$ Net present value$$ 2. For each site, compute the net present value, assuming that Wichita is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table above. If required, round to the nearest dollar. WichitaTopeka Present value of net cash flow total$$ Less amount to be invested$$ Net present value$$ 3. The net present value of the two sites over equal lives indicates that the Wichita Wichita Topeka site has a higher net present value and would be a superior investment.

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