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 | ||
1 | $230,000 | $480,000 | ||
2 | 230,000 | 480,000 | ||
3 | 230,000 | 480,000 | ||
4 | 230,000 | 480,000 |
Present Value of an Annuity of $1 at Compound Interest | |||||
Year | 6% | 10% | 12% | 15% | 20% |
1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 |
2 | 1.833 | 1.736 | 1.690 | 1.626 | 1.528 |
3 | 2.673 | 2.487 | 2.402 | 2.283 | 2.106 |
4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 |
5 | 4.212 | 3.791 | 3.605 | 3.352 | 2.991 |
6 | 4.917 | 4.355 | 4.111 | 3.784 | 3.326 |
7 | 5.582 | 4.868 | 4.564 | 4.160 | 3.605 |
8 | 6.210 | 5.335 | 4.968 | 4.487 | 3.837 |
9 | 6.802 | 5.759 | 5.328 | 4.772 | 4.031 |
10 | 7.360 | 6.145 | 5.650 | 5.019 | 4.192 |
The radio station requires an investment of $656,650, while the TV station requires an investment of $1,457,760. 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 | |
Present value of annual net cash flows | $ | $ |
Less amount to be invested | $ | $ |
Net present value | $ | $ |
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
Present Value Index | |
Radio Station | |
TV Station |
2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (b) using the present value of an annuity of $1 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest whole percent.
Radio Station | TV Station | |||
Present value factor for an annuity of $1 | ||||
Internal rate of return | % | % |
3. The net present value, present value index, and internal rate of return all indicate that the is a better financial opportunity compared to the , although both investments meet the minimum return criterion of 10%.
Present Value of an Annuity of $1 at Compound Interest | |||||
Year | 6% | 10% | 12% | 15% | 20% |
4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 |
Radio Station | TV Station | |
Annual net cash flows | $ 230,000 | $ 480,000 |
Multiply: Present Value of an Annuity of $1 at Compound Interest (Rate of 10%, Year = 4) |
3.170 | 3.170 |
Present value of annual net cash flows | $ 729,100 | $ 1,521,600 |
Less amount to be invested | $ 656,650 | $ 1,457,760 |
Net present value | $ 72,450 | $ 63,840 |
Radio Station | TV Station | |
Present value of annual net cash flows | $ 729,100 | $ 1,521,600 |
Divided by: amount to be invested | $ 656,650 | $ 1,457,760 |
Present value index | 1.11 | 1.04 |
Radio Station | TV Station | |
Amount to be invested | $ 656,650 | $ 1,457,760 |
Divided by: Annual net cash flows | $ 230,000 | $ 480,000 |
Present value factor for an annuity of $1 | 2.855 | 3.037 |
Internal rate of return | 15% | 12% |
The net present value, present value index, and internal rate of return all indicate that the internal rate of return is a better financial opportunity compared to the net present value, although both investments meet the minimum return criterion of 10%. |
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Media Inc. is considering...
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: Radio Station Year TV Station $370,000 $780,000 1 370,000 780,000 2 370,000 780,000 780,000 370,000 4 Present Value of an Annuity of $1 at Compound Interest 15% 20% 6% 10% 12% Year 0.870 0.833 0.909 0.893 0.943 1 1.528 1.690 1.626 1.736 1.833 2. 2.106 2.402...
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 1 $380,000 $720,000 2 380,000 720,000 3 380,000 720,000 4 380,000 720,000 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3...
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 1 $300,000 $540,000 2 300,000 540,000 3 300,000 540,000 4 300,000 540,000 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3...
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 1 $300,000 $540,000 2 300,000 540,000 3 300,000 540,000 4 300,000 540,000 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3...
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...
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 1 $420,000 $880,000 2 420,000 880,000 3 420,000 880,000 4 420,000 880,000 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Wind Turbines Biofuel Equipment 1 $200,000 $420,000 2 200,000 420,000 3 200,000 420,000 4 200,000 420,000 The wind turbines require an investment of $571,000, while the biofuel equipment requires an investment of $1,087,380. No residual value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Wind Biofuel Year Turbines Equipment $180,000 $360,000 180,000 360,000 180,000 360,000 180,000 360,000 The wind turbines require an investment of $513,900, while the biofuel equipment requires an investment of $1,093,320. No residual value is expected from either project. Present Value of...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Wind Turbines Biofuel Equipment 1 $200,000 $360,000 2 200,000 360,000 3 200,000 360,000 4 200,000 360,000 The wind turbines require an investment of $517,800, while the biofuel equipment requires an investment of $1,027,800. No residual value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Wind Turbines Biofuel Equipment $240,000 $430,000 2 240,000 430,000 240,000 430,000 240,000 430,000 3 The wind turbines require an investment of $685,200, while the biofuel equipment requires an investment of $1,113,270. No residual value is expected from either project. Present...