Question

Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company

The management of Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows:

Year		After Hours		Sun Fun
1		$320,000		$290,000
2		320,000		290,000
3		320,000		290,000
4		320,000		290,000

After Hours requires an investment of $913,600, while Sun Fun requires an investment of $880,730. No residual value is expected from either project.

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	3.353	2.991
6	4.917	4.355	4.111	3.785	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

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 above table. If required, round to the nearest dollar.

	After Hours	Sun Fun
Present value of annual net cash flows	$	$
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
After Hours
Sun Fun

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 table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.

	After Hours	Sun Fun
Present value factor for an annuity of $1
Internal rate of return	%	%

Answer 1

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 above table. If required, round to the nearest dollar.

	After Hours	Sun Fun
Present value of annual net cash flows	320000*3.17 = 1014400	290000*3.17 = 919300
Amount to be invested	-913600	-880730
Net present value	100800	38570

1b. Compute a present value index for each project. If required, round your answers to two decimal places.

	Present Value Index
After Hours	1014400/913600 = 1.11
Sun Fun	919300/880730 = 1.04

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 table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.

	After Hours	Sun Fun
Present value factor for an annuity of $1	913600/320000 = 2.855	880730/290000 = 3.037
Internal rate of return	15 %	12 %