The investment committee of Shield Insurance Co. is evaluating two projects, off
ID: 2455413 • Letter: T
Question
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 $1,016,000. The estimated net cash flows from each project are as follows:
Office Expansion
Server Upgrade
The committee has selected a rate of 12% 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 $334,000.
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.
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.
Net Cash Flow YearOffice Expansion
Server Upgrade
1 $267,000 $352,000 2 267,000 352,000 3 267,000 352,000 4 267,000 352,000 5 267,000 6 267,000Explanation / Answer
Part 1
Net Present value under 1st method(Office expansion)
Conclusion: Office Expansion is better Option than server Upgrade
2:
Present CF
Office Expansion
Present CF
Server Upgradation
Conclusion: server Upgrade is better option than Office Expansion.
Net Present value under 1st method(server Upgrade) Year Particulars Cash Flow Present value@12% Net cash Flow 1-4 Present value of net cash flow total 352,000 3.037 1,069,024 0 Less amount to be invested 1,016,000 1 (1,016,000) Net Present Value 53,024 Equisalised Annualised cost 53024/3.037 17,459Related Questions
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