Question

net present value method, internal rate of return method, and analysis

Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Radio Station TV Station $410,000 $820,000 410,000 820,000 410,000 820,000 410,000 820,000 Present Value of an Annuity of $1 at Compound Interest Year 6% 3 2 0.943 1.833 .673 3.465 4.212 4.917 10% 0.909 1.736 2.487 3.170 3.791 4.355 4 12% 15% 20% 0.893 0.870 0.833 1.690 1.626 1.528 2.402 2.283 2.106 3.037 2.855 2.589 3.605 3.352 2.991 4.111 3.784 3.326 4,564 4.160 3.605 4.968 4.487 3.837 5.328 4.772 4.031 5.6505.0194 .192 6 7 5 .582 4.868 B 6.210 5.335 9 6.802 5.759 107.3606 .145 The radio station requires an investment of $1,061,490, while the TV station requires an investment of $2,341,100. No residual value is expected from either project. Required: 1a. Compute the net present value for each project. Use a rate of 10% and the present value of an annuity of $1 in the table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest whole dollar Radio Station TV Station

Answer 1

NPV = Present value of cash inflows - Present value of cash outflows
	Radio Station	TV Station
Present value of annual net cash flows	1299700	2599400
Less amount to be invested	1061490	2341100
Net Present Value	238210	258300
	Radio Station	TV Station
PV Index = Present value of cash inflows/Initial investment	1.224410969	1.11033275
	Radio Station	TV Station
Present value annuity factor	2.589	2.855
IRR	20%	15%
Radio Station is better

B C 1 NPV = Present value of cash inflows - Present value of cash outflows 4. Present value of annual net cash flows 5 Less amount to be invested 6 Net Present Value Radio Station TV Station =410000*3.17 =820000*3.17 =10614902341100 =B4-B5 =C4-C5 Radio Station =B4/B5 TV Station =C4/C5 9 PV Index = Present value of cash inflows/Initial investment 10 11 12 Present value annuity factor 13 IRR 14 15 Radio Station is better Radio Station TV Station =B5/410000 =C5/820000 0.2 0.15