Alternative Capital Investments The investment committee of Shield Insurance Co.

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 $496,000. The estimated net cash flows from each project are as follows:

Net Cash Flow Year Office Expansion Server Upgrade $130,000 130,000 130,000 130,000 130,000 130,000 $172,000 172,000 172,000 172,000 2 4 6 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 $163,000 Present Value of $1 at Compound Interest 10% 12% 0.893 0.890 0.826 0.7970.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 Year 690 15% 20% 0.943 0.909 0.870 0.833 2 6 8 0.247

Explanation / Answer

Answer:1

Answer:2

Answer:3 The net present value of two projects over the equal lives indicates that the server upgrade has the higher net present value and would be superior investment.

Particulars Office expansion Server upgrade Present value of annual net cash flows 638228 522536 Less: amount to be invested 496000 496000 Net present Value 142228 26536

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