Alternative capital investments 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 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 5 310,000 310,000 6 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 Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 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. Total present value of net cash flow Amount to be invested Net present value Wichita 1,031,060 X Topeka 1,035,600 900,000 900,000 131,060 X 135,600 3. The net present value of the two sites over equal lives indicates that the Wichita Feedback site has a higher net present value and would be a superior investment. Check My Work 1. For each site, multiply the annual net cash flow by the present value of an annuity factor (6 periods at 20% for Wichita; 4 periods at 20% for Topeka; Refer Exhibit 5 in the text). Subtract the amount to be invested. 2. For each site, multiply the present value factor by the net cash flow, including the residual value for Wichita. Subtract the amount to be invested from the total present value of the net cash flow. 3. Compare over equal lives.