The management of Quest Media Inc. is considering two capital investment project

Question

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 $210,000 210,000 210,000 210,000 TV Station $400,000 2 3 4 400,000 400,000 400,000 Present Value of an Annuity of $1 at Compound Interest 6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 1090 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 12% 0.893 1.690 2.402 3.037 3.605 1590 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 Year 2 4.564 4.968 5.328 5.650 10 The radio station requires an investment of $599,550, while the TV station requires an investment of $1,035,600. No residual value is expected from either project.

Explanation / Answer

Workings:

1a Radio Station Tv Station Present Value of Cash Flows        665,700.00      1,268,000.00 Less: Amount to be Invested        599,550.00      1,035,600.00 Net present Value          66,150.00          232,400.00 1b Present Value Index= Present Value of Cash Flows/ Amount to be Invested Calculation Present Value index Radio Station 665700/599550                       1.11 Tv Station 1268000/1035600                       1.22 2 Radio Station Tv Station Present Value Factor 2.855 2.589 Tv Station 15% 20% 3 TV Station is a better financial opportunity compared to the Radio Stations

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