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	$270,000		$570,000
2	270,000		570,000
3	270,000		570,000
4	270,000		570,000

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 $819,990, while the TV station requires an investment of $1,627,350. 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%.

Answer 1

Solution 1a:

Computation of NPV
			Radio Station		TV station
Particulars	Period	PV Factor (18%)	Amount	Present Value	Amount	Present Value
Cash outflows:
Initial investment	0	1	$819,990	$819,990	$1,627,350	$1,627,350
Present Value of Cash outflows (A)				$819,990		$1,627,350
Cash Inflows
Annual cash inflows	1-4	3.170	$270,000	$855,900	$570,000	$1,806,900
Present Value of Cash Inflows (B)				$855,900		$1,806,900
Net Present Value (NPV) (B-A)				$35,910		$179,550

Solution 1b:

Present Value Index
Particulars	Radio Station	TV station
Present value of cash inflows	$855,900	$1,806,900
Initial investment	$819,990	$1,627,350
Present value index ( PV of cash inflows/Initial investment)	$1.04	$1.11

Solution 2:

Computation of IRR
Particulars	Radio Station	TV station
Initial investment	$819,990	$1,627,350
Annual cash inflows	$270,000	$570,000
Present value factor for an annuity of $1	3.037	2.855
Refer factor table, IRR	12%	15%

Solution 3:

The net present value, present value index, and internal rate of return all indicate that the TV station is a better financial opportunity compared to the radio station,  although both investments meet the minimum return criterion of 10%.