The Old Salty Dog Restaurant is considering an investment in a new com- puterized bar. For the two bar systems under consideration, management has estimated the following relevant annual net cash flows:

=

System A

-$120,000 +$60,000

+$60,000 +$60,000 Year 0O ] Zz 3 System B

-$120,000 +$10,000

+$10,000 +$181,000 Year O ] 2 3)

The manager has estimated that the weighted average cost of capital for the in- vestment is 12%. (Assume the restaurant uses a WACC approach to NPV.)

Required:

1, Determine which bar system would be selected on the basis of the payback criterion.

2. Plot the NPV profile of each alternative on the same graph.

3. Determine which bar system would be selected on the basis of the IRR criterion.

4. Determine which bar system would be selected on the basis of the NPV criterion.
5. Given your answers to 1-4 above, which bar should be selected? Why?