Alternative Capital Investments The investment committee ofShield Insurance Co. is evaluating two projects, office expansionand upgrade to computer servers. The projects have different usefullives, but each requires an investment of $1,239,000. The estimatednet cash flows from each project are as follows:
Alternative Capital Investments
The investment committee of Shield Insurance Co. is evaluatingtwo projects, office expansion and upgrade to computer servers. Theprojects have different useful lives, but each requires aninvestment of $1,239,000. The estimated net cash flows from eachproject are as follows:
The committee has selected a rate of 15% for purposes of netpresent value analysis. It also estimates that the residual valueat the end of each project's useful life is $0, but at the end ofthe fourth year, the office expansion's residual value would be$433,000.
Required:
If required, use the minus sign to indicate a negative netpresent value.
1. For each project, compute the net presentvalue. Use the present value of an annuity of $1 table above.Ignore the unequal lives of the projects. If required, round to thenearest 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 presentvalue, assuming that the office expansion is adjusted to afour-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
$ _________________
$ _________________
3. The net present value of the two projectsover equal lives indicates that the _________________ has a highernet present value and would be a superior investment.
Alternative Capital Investments The investment committee ofShield Insurance Co. is evaluating two projects, office expansionand upgrade to computer servers. The projects have different usefullives, but each requires an investment of $1,239,000. The estimatednet cash flows from each project are as follows:
Alternative Capital Investments
The investment committee of Shield Insurance Co. is evaluatingtwo projects, office expansion and upgrade to computer servers. Theprojects have different useful lives, but each requires aninvestment of $1,239,000. The estimated net cash flows from eachproject are as follows:
The committee has selected a rate of 15% for purposes of netpresent value analysis. It also estimates that the residual valueat the end of each project's useful life is $0, but at the end ofthe fourth year, the office expansion's residual value would be$433,000.
Required:
If required, use the minus sign to indicate a negative netpresent value.
1. For each project, compute the net presentvalue. Use the present value of an annuity of $1 table above.Ignore the unequal lives of the projects. If required, round to thenearest 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 presentvalue, assuming that the office expansion is adjusted to afour-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 | $ _________________ | $ _________________ |
3. The net present value of the two projectsover equal lives indicates that the _________________ has a highernet present value and would be a superior investment.
Related questions
Alternative Capital Investments
The investment committee of Shield Insurance Co. is evaluatingtwo projects, office expansion and upgrade to computer servers. Theprojects have different useful lives, but each requires aninvestment of $1,239,000. The estimated net cash flows from eachproject are as follows:
Net Cash Flow | ||||||||
Year |
Office Expansion |
Server Upgrade | ||||||
1 | $346,000 | $457,000 | ||||||
2 | 346,000 | 457,000 | ||||||
3 | 346,000 | 457,000 | ||||||
4 | 346,000 | 457,000 | ||||||
5 | 346,000 | |||||||
6 | 346,000 | |||||||
The committee has selected a rate of 15% for purposes of netpresent value analysis. It also estimates that the residual valueat the end of each project's useful life is $0, but at the end ofthe fourth year, the office expansion's residual value would be$433,000.
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 CompoundInterest | |||||
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 netpresent value.
1. For each project, compute the net presentvalue. Use the present value of an annuity of $1 table above.Ignore the unequal lives of the projects. If required, round to thenearest 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 presentvalue, assuming that the office expansion is adjusted to afour-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 | $ _________________ | $ _________________ |
3. The net present value of the two projectsover equal lives indicates that the _________________ has a highernet present value and would be a superior investment.
Alternative Capital Investments
The investment committee of Shield Insurance Co. is evaluatingtwo projects, office expansion and upgrade to computer servers. Theprojects have different useful lives, but each requires aninvestment of $629,000. The estimated net cash flows from eachproject are as follows:
| Net CashFlow | ||||||||
| Year | Office Expansion | Server Upgrade | ||||||
| 1 | $165,000 | $218,000 | ||||||
| 2 | 165,000 | 218,000 | ||||||
| 3 | 165,000 | 218,000 | ||||||
| 4 | 165,000 | 218,000 | ||||||
| 5 | 165,000 | |||||||
| 6 | 165,000 | |||||||
The committee has selected a rate of 12% for purposes of netpresent value analysis. It also estimates that the residual valueat the end of each project's useful life is $0, but at the end ofthe fourth year, the office expansion's residual value would be$206,000.
| Present Valueof $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 Valueof 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 netpresent value.
1. For each project, compute the net presentvalue. Use the present value of an annuity of $1 table above.Ignore the unequal lives of the projects. If required, round to thenearest dollar.
| OfficeExpansion | ServerUpgrade | |
| Present value of annual net cashflows | $ | $ |
| Less amount to be invested | $ | $ |
| Net present value | $ | $ |
2. For each project, compute the net presentvalue, assuming that the office expansion is adjusted to afour-year life for purposes of analysis. Use the present value of$1 table above.
| OfficeExpansion | ServerUpgrade | |
| Present value of net cash flowtotal | $ | $ |
| Less amount to be invested | $ | $ |
| Net present value | $ | $ |
