The management of Style Networks Inc. is considering two TV show projects. The e
ID: 2452413 • Letter: T
Question
The management of Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows: 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 3.352 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 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 $ $ 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 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 % % 3. The net present value, present value index, and internal rate of return all indicate that the TV show is a better financial opportunity compared to the TV show, although both investments meet the minimum return criterion of 10%.
Explanation / Answer
In the absence of cash inflow and duration of project, we assume that cash flow each year $ 300,000 and project duration 5 Years.
Net Present Value @ 10% Required rate of return is as follows:
Amounts in Dollar ($)
1(a)
223400
256270
1(b)
Statement of Project Index
(2)
Staement of Internal Rate of Return
L= Lower Rate of REturn
H=Higher rate of return
A=NPV at Lower rate
B=NPV at higher rate
IRR
After Hours Years Cash inflow Discount factor @ 10% Present Value 0 913600 1.00 -913600 1 300000 0.91 272700 2 300000 0.83 247800 3 300000 0.75 225300 4 300000 0.68 204900 5 300000 0.62 186300 Net Present Value223400
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