Singing Fish Fine Foods has $2,000,000 for capital investments this year and is considering two potential projects for the funds. Project one is updating the deli section of the store for additional food service. The estimated annual after-tax cash flow of this project is $600,000 per year for the next five years. Project two is updating the wine section of the store. Estimated annual after-tax cash flow for this project is $530,000 for the next six years.
1) If the appropriate discount rate for the deli expansion is 9.5% and the appropriate discount rate for the wine section is 9.0%, using NPV, determine which project Singing Fish should choose for the parcel of land.
2) Now adjust for unequal lives with the equivalent annual cost. Does the decision change?