Question
Suppose you own a concession stand that sells food and drinks at a stadium. You have three years left on the contract with the stadium,
Suppose you own a concession stand that sells food and drinks at a stadium. You have three years left on the contract with the stadium, and you do not expect it to be renewed. Long lines limit sales and profits. You have developed four proposals to reduce the line length. Your first proposal is adding another window. The second is to update the equipment at the existing windows. These two renovations are not mutually exclusive; you could do both. The third and fourth proposals involve abandoning the existing stand. The third proposal is to build a new stand. The fourth is to rent a larger stand in the stadium. This option would involve $1,000 in up front investment for new signs and equipment installation; the incremental cash flows shown in later years are net of lease payments. You have decided that a 15% discount rate is appropriate for this type of investment. The incremental cash flows associated with each of the proposals are:
Project | Investment | Year 1 | Year 2 | Year 3 |
Add New | -$75,000 | 44,000 | 44,000 | 44,000 |
Update Existing Equipment | -50,000 | 23,000 | 23,000 | 23,000 |
Build a New Stand | -125,000 | 70,000 | 70,000 | 70,000 |
Rent a Larger Stand | -1,000 | 12,000 | 13,000 | 14,000 |
1. Using the internal rate of return rule (IRR), which proposal(s) do you recommend?
2. Using the net present value rule (NPV), which proposal(s) do you recommend?
3. How do you explain any differences between IRR and NPV rankings? Which rule is better?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started