Alternative capital investments OBJ. 3, 4 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.

Instructions 1. For each site, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5). (Ignore the unequal lives of the projects.)

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 appearing in this chapter (Exhibit 2).

3. Prepare a report to the investment committee, providing your advice on the relative merits of the two sites.