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 $1,039,000. The estimated net cash flows from each project are as follows:

Net Cash Flow
Year Office Expansion Server Upgrade

1 $261,000 $345,000

2 261,000 345,000
3 261,000 345,000
4 261,000 345,000
5 261,000
6 261,000

The committee has selected a rate of 10% 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 $326,000.

Present Value of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162

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

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 present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If required, round to the nearest dollar.

Office Expansion Server Upgrade
Present value of annual net cash flows $_____________ $____________
Less amount to be invested $______________ $_____________
Net present value $______________ $______________

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.

Office Expansion Server Upgrade
Present value of net cash flow total $______________ $_____________
Less amount to be invested $_______________ $______________
Net present value $ ______________ $______________

Explanation / Answer

Answer

1)

2)

working

1)

Office Expansion

Present value of annual net cash flows = Annual cash flow * PVIFA(rate,nper)

Present value of annual net cash flows = 261000*PVIFA(10%,6)

Present value of annual net cash flows = 261000*4.355

Present value of annual net cash flows = 1,136,655

Server Upgrade

Present value of annual net cash flows = Annual cash flow * PVIFA(rate,nper)

Present value of annual net cash flows = 345000*PVIFA(10%,4)

Present value of annual net cash flows = 345000*3.170

Present value of annual net cash flows = 1093650

2)

Office Expansion

Present value of annual net cash flows = Annual cash flow * PVIFA(rate,nper) + Salvage Value*PVIF(rate,nper)

Present value of annual net cash flows = 261000*PVIFA(10%,4)+326000*PVIF(10%,4)

Present value of annual net cash flows = 261000*3.170 + 326000*0.683

Present value of annual net cash flows = 1,050,028

Server Upgrade

Present value of annual net cash flows = Annual cash flow * PVIFA(rate,nper)

Present value of annual net cash flows = 345000*PVIFA(10%,4)

Present value of annual net cash flows = 345000*3.170

Present value of annual net cash flows = 1093650

Office Expansion Server Upgrade Present value of annual net cash flows 1136655 1093650 Less amount to be invested    1039000 1039000 Net present value 97655 54650

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.