Problem 16-53 Ranking Investment Proposals; NPV versus Profitability Index; Taxes (Section 2) (LO 16-4, 16-6, 16-7)

The owner of Waco Waffle House is considering an expansion of the business. He has identified two alternatives, as follows:

• Build a new restaurant near the mall.
• Buy and renovate an old building downtown for the new restaurant.

The projected cash flows from these two alternatives are shown below. The owner of the restaurant uses a 12 percent after-tax discount rate.

Investment Proposal	Cash Outflow: Time 0			Net After-Tax Cash Inflows*
				Years 110			Years 1120
Mall restaurant	$	453,000		$	64,000		$	64,000
Downtown restaurant		205,500			40,000

* Includes after-tax cash flows from all sources, including incremental revenue, incremental expenses, and depreciation tax shield. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required: 1. Compute the net present value of each alternative restaurant site.

	Net Present Value
Mall restaurant
Downtown restaurant

2. Compute the profitability index for each alternative.

	Profitablility Index
Mall restaurant
Downtown restaurant

3. How do the two sites rank in terms of NPV and the profitability index?

	NPV	Profitablility Index
Mall restaurant
Downtown restaurant