The investment committee of Shield Insurance Co. is evaluating two projects, off

Question

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 $485,000. The estimated net cash flows from each project are as follows:

Office Expansion

Server Upgrade

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 $159,000.

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 The sum of the present values of a series of equal cash flows to be received at fixed intervals.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.

Note: Round final answers to the nearest whole dollar.

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

Net Cash Flow Year     

Office Expansion

    

Server Upgrade

1 $127,000 $168,000 2 127,000 168,000 3 127,000 168,000 4 127,000 168,000 5 127,000 6 127,000

Explanation / Answer

1.

2. Computation of NPV if assuming office expansion is adjusted to four years life -

3. based on the calculation in 2nd option(equal lives) server upgrade has higher NPV and would be a superior investment plan.

Please note all values are in $.

Inc case of any clarification required please comment.

Particulars office expansion Server upgrade Present value of annual net cash flows (127000*4.1114),(168000*3.0374) 522147.8 510283.2 Less amount to be invested (Given) 485000 485000 Net present value 37147.8 25283.2

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