Alternative Capital Investments The investment committee of Shield Insurance Co.
ID: 2425842 • Letter: A
Question
Alternative Capital Investments The investment committee of Shield Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $1,239,000. The estimated net cash flows from each project are as follows:
Alternative Capital Investments
The investment committee of Shield Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $1,239,000. The estimated net cash flows from each project are as follows:
The committee has selected a rate of 15% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $433,000.
Required:
If required, use the minus sign to indicate a negative net present value.
1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If required, round to the nearest dollar.
Office Expansion
Server Upgrade
Present value of annual net cash flows
$ _________________
$ _________________
Less amount to be invested
$ _________________
$ _________________
Net present value
$ _________________
$ _________________
2. For each project, compute the net present value, assuming that the office expansion is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table above.
Office Expansion
Server Upgrade
Present value of net cash flow total
$ _________________
$ _________________
Less amount to be invested
$ _________________
$ _________________
Net present value
$ _________________
$ _________________
3. The net present value of the two projects over equal lives indicates that the _________________ has a higher net present value and would be a superior investment.
Office Expansion
Server Upgrade
Present value of annual net cash flows
$ _________________
$ _________________
Less amount to be invested
$ _________________
$ _________________
Net present value
$ _________________
$ _________________
Explanation / Answer
Answer:1 PV of net cash Flow:
Office expansion =346000(PVIFA15%,6)
=1309437
Server Upgrade=457000(PVIFA15%,4)=1304735
Answer: PV of net cash Flow:
Office expansion =346000(PVIFA15%,4)
=987830
Server Upgrade=457000(PVIFA15%,4)=1304735
Answer: Server grade
Particulars Office expansion Server Upgrade PV of annual net cash flows 1309437 1304735 Less: Amount to be invested 1239000 1239000 NPV 70437 65735Related Questions
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