Question

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	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 $983,820, while the TV station requires an investment of $2,055,600. 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		%		%

Answer 1

Answer 1a:

Radio Station:

Present Value of Annual Net Cash Flows = $380,000 * PVA of $1 (10%, 4)
Present Value of Annual Net Cash Flows = $380,000 * 3.170
Present Value of Annual Net Cash Flows = $1,204,600

Net Present Value = Present Value of Annual Net Cash Flows - Amount to be Invested
Net Present Value = $1,204,600 - $983,820
Net Present Value = $220,780

TV Station:

Present Value of Annual Net Cash Flows = $720,000 * PVA of $1 (10%, 4)
Present Value of Annual Net Cash Flows = $720,000 * 3.170
Present Value of Annual Net Cash Flows = $2,282,400

Net Present Value = Present Value of Annual Net Cash Flows - Amount to be Invested
Net Present Value = $2,282,400 - $2,055,600
Net Present Value = $226,800

Answer 1b:

Radio Station:

Present Value Index = Net Present Value / Amount to be Invested
Present Value Index = $220,780 / $983,820
Present Value Index = 0.22

TV Station:

Present Value Index = Net Present Value / Amount to be Invested
Present Value Index = $226,800 / $2,055,600
Present Value Index = 0.11

Answer 2:

Radio Station:

Present Value Factor for an Annuity of $1 = Amount to be Invested / Annual Cash Flows
Present Value Factor for an Annuity of $1 = $983,820 / $380,000
Present Value Factor for an Annuity of $1 = 2.589

Using table values, IRR is 20%

TV Station:

Present Value Factor for an Annuity of $1 = Amount to be Invested / Annual Cash Flows
Present Value Factor for an Annuity of $1 = $2,055,600 / $720,000
Present Value Factor for an Annuity of $1 = 2.855

Using table values, IRR is 15%