The committee has selected a rate of 12% for purposes of net present value analy

Question

The committee has selected a rate of 12% 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 $200,000.

Required:

1. For each project, compute the net present value. Use the present value of an annuity of $1 table present above. Ignore the unequal lives of the projects. If required, round to the nearest dollar.

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 present above.

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

Explanation / Answer

A)
Office Expansion Server Upgrade

Present value of annual net cash flows: 657760 637770

Less amount to be invested: 610000 610000

Net present value 47760 27770

B)

Office Expansion Server Upgrade

Present value of net cash flow total: 613280 637980

Less amount to be invested: 610000 610000

Net present value: 3280 27980

This is the only right answer

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