NPV unequal lives. Grady Enterprises is looking at two project opportunities for a parcel of land the company currently owns. The first project is a restaurant, and the second project is a sports facility. The projectedcash flow of the restaurant is an initial cost of $1,600,000 with cash flows over the next six years of $180,000 (year one), $290,000 (year two), $270,000 (years three through five), and $1,760,000 (year six), at whichpoint Grady plans to sell the restaurant. The sports facility has the following cash flows: an initial cost of $2,430,000 with cash flows over the next four years of $440,000 (years one through three) and $3,050,000 (yearfour), at which point Grady plans to sell the facility. If the appropriate discount rate for the restaurant is 10.0% and the appropriate discount rate for the sports facility is 12.0%, use the NPV to determine which projectGrady should choose for the parcel of land. Adjust the NPV for unequal lives with the equivalent annual annuity. Does the decision change?

Let us first determine the NPV of the two projects. We know that NPV = sum of all PVs PV = cash flow…

Answered: NPV unequal lives. Grady Enterprises is…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $4 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $8 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's tax-rate is 20% Assume that THSI's cost of capital for this project is 15%. The net present value (NPV) of this temporary housing project is closest to:
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