Net Present Value Method, Internal Rate of Return Method, and Analysis The manag

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Net Present Value Method, Internal Rate of Return Method, and Analysis

The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:

Year            Radio Station                  TV Station

1 $350,000 $670,000

2 350,000 670,000

3 350,000 670,000

4 350,000 670,000

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

The radio station requires an investment of $906,150, while the TV station requires an investment of $1,912,850. No residual value is expected from either project.

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 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest whole dollar.

                                                                                       Radio Station                          TV Station

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

Radio Station

TV Station

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 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest whole percent.

                                                                      Radio Station                             TV Station   

Present value factor for an annuity of $1

Internal rate of return                                                    %                                                          %

Explanation / Answer

Solution.

1a. Computetion of net present value for each project

1b. Computetion of present value index for each project.

Present value index for Radio Station = $1,109,150 / $906,150 = 1.22

Present value index for TV Station = $2,123,230 / $1,912,850 = 1.11.

2. Determinetion of internal rate of return for each project.

Year Radio Station TV Station Table value Radio Station TV Station 0      (906,150.00)    (1,912,850.00)            1.0000     (906,150.00)    (1,912,850.00) 1        350,000.00          670,000.00            0.9090        318,150.00          609,030.00 2        350,000.00          670,000.00            0.8260        289,100.00          553,420.00 3        350,000.00          670,000.00            0.7510        262,850.00          503,170.00 4        350,000.00          670,000.00            0.6830        239,050.00          457,610.00 NPV        203,000.00          210,380.00

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