In: Accounting
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
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 |