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 | $740,000 | ||
| 2 | 350,000 | 740,000 | ||
| 3 | 350,000 | 740,000 | ||
| 4 | 350,000 | 740,000 | ||
| 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 $999,250, while the TV station requires an investment of $1,915,860. 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 $1 | ||||
| Internal rate of return | % | % |
1 a)
|
RADIO STATION |
TV STATION |
|
|
=350000*3.170 =$ 1109500 |
=740000*3.170 =$ 2345800 |
|
$ 999250 |
$ 1915860 |
|
NET PRESENT VALUE (1-2) |
$ 110250 |
$ 429940 |
1 b) PRESENT VALUE INDEX = PRESENT VALUE OF NET CASH FLOWS / INITIAL INVESTMENT
|
PRESENT VALUE INDEX |
|
|
RADIO STATION |
1.11 |
|
TV STATION |
1.22 |
2
|
RADIO STATION |
TV STATION |
|
|
PV FACTOR FOR AN ANNUITY OF $ 1 |
2.855 |
2.589 |
|
INTERNAL RATE OF RETURN |
15% |
20% |
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