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Net Present Value Method, A method of analysis of proposed capital investments that uses present value...

  1. Net Present Value Method, A method of analysis of proposed capital investments that uses present value concepts to compute the rate of return from the net cash flows expected from the investment.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 $360,000 $760,000
    2 360,000 760,000
    3 360,000 760,000
    4 360,000 760,000
    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 $1,093,320, while the TV station requires an investment of $2,169,800. 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 The sum of the present values of a series of equal cash flows to be received at fixed intervals.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 An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.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 A series of equal cash flows at fixed intervals.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 tv station

    • radio station
    • tv station
    is a better financial opportunity compared to the radio station
    • radio station
    • tv station
    , although both investments meet the minimum return criterion of 10%.

Solutions

Expert Solution

1a
Radio Station TV Station
Present value of annual net cash flows 1141200 2409200
Less amount to be invested 1093320 2169800
Net present value 47880 239400
1b
Present Value Index
Radio Station 1.04 =1141200/1093320
TV Station 1.11 =2409200/2169800
2
Radio Station TV Station
Present value factor for an annuity of $1 3.037 2.855
Internal rate of return 12% 15%
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%.
Workings:
Radio Station TV Station
Present value of annual net cash flows =360000*3.170 =760000*3.170
Radio Station TV Station
Present value factor for an annuity of $1 =1093320/360000 =2169800/760000

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