Net Present Value Method, Internal Rate of Return Method, and Analysis The manag
ID: 2569966 • Letter: N
Question
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 4 170,000 310,000Explanation / Answer
1a Radio Station TV Station Present value of annual net cash flows 538900 982700 Less amount to be invested 485350 802590 Net present value 53550 180110 b Present Value Index=Present value of annual net cash flows/Investment Radio Station 1.11 TV Station 1.22 2 Radio Station TV Station Present value factor for an annuity of $1 2.855 2.589 Internal rate of return 15% 20% 3 The net present value, present value index, and internal rate of return all indicate that the TV station is a better financial opportunity compared to the radio station, although both investments meet the minimum return criterion of 10%
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