Alternative Capital Investments The investment committee of Shield Insurance Co.
ID: 2457344 • 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 $1,229,000. The estimated net cash flows from each project are as follows:
Office Expansion
Server Upgrade
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 $429,000.
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.
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.
Net Cash Flow YearOffice Expansion
Server Upgrade
1 $343,000 $453,000 2 343,000 453,000 3 343,000 453,000 4 343,000 453,000 5 343,000 6 343,000Explanation / Answer
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.
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.
Project of server Upgrade would be having higher NPV of 68788 so it would be selected.
Rough calculations
Project Server Upgrade Office Expansion Sum of discounted cash inflow 1293305 1298078 sum of discounted cash outflow -1229000 -1229000 Net Present value 2522305 2527078 Excess of NPV of office expansion 4772.366Related Questions
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