Question 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 18 percent after-tax discount rate.

Investment

Proposal Cash Outflow:

Time 0 Net After-Tax Cash Inflows*

Years 110 Years 1120

Mall restaurant $ 353,000 $ 71,000 $ 71,000

Downtown restaurant 178,000 44,500

* 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:

Compute the net present value of each alternative restaurant site.

Compute the profitability index for each alternative.

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

1. Net Present Value: of Mall Restaurant

Net Present Value of Downtown Restaurant

2. Profitability Index of Mall Restaurant

Profitability of Downtown Restaurant

3. Mall Restaurant: NPV: Profit:

Downtown Restaurant: NPV: Profit

Future Value and Present Value Tables Table IV