Net Present Value Method, Internal Rate of Return Method, and Analysis The manag

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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:

The radio station requires an investment of $485,350, while the TV station requires an investment of $802,590. 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.

1b. Compute a present value index for each project. If required, round your answers to two decimal places.

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.

3. The net present value, present value index, and internal rate of return all indicate that the is a better financial opportunity compared to the , although both investments meet the minimum return criterion of 10%.

Year Radio Station TV Station 1 $170,000 $310,000 2 170,000 310,000 3 170,000 310,000 4 170,000 310,000

Explanation / Answer

he company will be more profitable where they will get higher NPV and IRR rate

1a. Compute the net present value for each project Radio Station TV Station Present value of annual net cash flows 2155600 3930800 Less amount to be invested 485350 802590 Net present value 1670250 3128210 170000 310000 1b. Compute a present value index for each project. Present Value Index= The ratio of the NPV of a project to the initial outlay required for it. Radio Station 3.441330998 TV Station 0.795820189 2. Determine the internal rate of return for each project Radio Station TV Station Present value factor for an annuity of $1 3.17 3.17 Internal rate of return 10.36 9.81 NPV @10% 1670250 3128210 NPV@12% 1579810 3455880 dIFF 90440 -327670 IIR= R1 + ((NPV1 x (R2 - R1)) / (NPV1 - NPV2)); where R1 and R2 are the randomly selected discount rates, and NPV1 and NPV2 are the higher and lower net present values,

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