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 $1,500,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year Server Upgrade $498,000 498,000 498,000 498,000 Office Expansion $377,000 377,000 377,000 377,000 377,000 377,000 The committee has selected a rate of 10% or purposes of net present value analysis. It also estimates that the residual fourth year, the office expansion's residual value would be $471,000. e at he end ofea pro use 1 -s but at een fie

Explanation / Answer

1 Office expansion Server upgrade Present value of annual net cash flows 1641835 1578660 Less amount to be invested 1500000 1500000 Net present value 141835 78660 2 Office expansion Server upgrade Present value of annual net cash flows 1516783 1578660 Less amount to be invested 1500000 1500000 Net present value 16783 78660 3 The net present value of two projects over equal lives indicates that Server Upgrade has a higher net present value

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