Question

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	$290,000		$610,000
2	290,000		610,000
3	290,000		610,000
4	290,000		610,000

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 $827,950, while the TV station requires an investment of $1,852,570. 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 (radio station / TV station) is a better financial opportunity compared to the (radio station / TV station), although both investments meet the minimum return criterion of 10%.

Answer 1

1.a.	Calculation of PV of Cash Inflow
		Radio Station	TV Station
	Cash Inflow per year	$290,000	$610,000
	Annuity of $1 at 4 years for 10%	3.170	3.170
	PV of annual net cash flows	$919,300	$1,933,700
	(290,000*3.170, 610,000*3.170)
	Less: Amount Invested	$827,950	$1,852,570
	Net Present Value	$91,350	$81,130
1.b	PV Index or Profitability Index = PV of Cash Flows / Amount Invested
		Radio Station	TV Station
	PV of annual net cash flows	$919,300	$1,933,700
	Amount Invested	$827,950	$1,852,570
	PV Index	1.1103	1.0438
2	At Internal rate of return(IRR) the NPV is 0, in other words the PV of net cash flows is equal to amount invested
	So in this case we have to find out the rate at which the PV of cash inflow is equal to amount invested
		Radio Station	TV Station
	Amount Invested	$827,950	$1,852,570
	PV factor for an annuity of $1 at 15%	$290,000*2.855 = $827,950
	IRR	15%
	PV factor for an annuity of $1 at 12%		$610,000*3.037 = $1,852,570
	IRR		12%
3	Since the NPV, PV Index and IRR of Radio station is more then as compared to TV station, hence it is a better investment opportunity