Alternative Capital Investments The committee has selected a rate of 12% for pur

Question

Alternative Capital Investments

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 $180,000.

Required:

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 Selectoffice expansionserver upgradeItem 13 has a higher net present value and would be a superior investment.

Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162

Explanation / Answer

cash outflow 490000 cash outflow 490000 office expansion Answer to A Years net cash inflow present value @12% present value of cash flows Upgradation Years net cash inflow present value @12% present value of cash flows 1 125000 0.892857 111607.14 1 165000 0.892857 147321.4 2 125000 0.797194 99649.235 2 165000 0.797194 131537 3 125000 0.71178 88972.531 3 165000 0.71178 117443.7 4 125000 0.635518 79439.76 4 165000 0.635518 104860.5 5 125000 0.567427 70928.357 6 125000 0.506631 63328.89 sum of present value of cash flow 501162.6 180000 0.506631 91193.602 cash outflow 490000 NPV 11162.64 sum of present value of cash flow 605119.52 cash outflow 490000 o NPV 115119.52 Office expansion with equal lives answer to B Years net cash inflow present value @12% present value of cash flows 1 125000 0.892857 111607.14 2 125000 0.797194 99649.235 3 125000 0.71178 88972.531 4 125000 0.635518 79439.76 180000 0.635518 114393.25 sum of present value of cash flow 609181.44 cash outflow 490000 NPV 119181.44 Answer to c Yes office expansion is a better option

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