Net Present Value Method, Internal Rate of Return Method, and Analysis The manag
ID: 2487020 • 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 $628,100, while the TV station requires an investment of $1,336,280. 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 $220,000 $440,000 2 220,000 440,000 3 220,000 440,000 4 220,000 440,000Explanation / Answer
Answer 1.
Radio Station :
Present Value of Annual Cash Flow = 220,000*3.170 = $697,400
Present Value of Investment = $628,100
Net Present Value of Radio Station = $69,300
TV Station :
Present Value of Annual Cash Flow = 440,000*3.170 = $1,394,800
Present Value of Investment = $1,336,280
Net Present Value of Radio Station = $58,520
Answer 2.
Net Present Value Index for Radio Station = 697,400 / 628,100 = 1.11
Net Present Value Index for TV Station = 1,394,800 / 1,336,280 = 1.04
Answer 3.
Using Present Value Factor for an Annuity of $1.
IRR is the rate at which NPV of the project is zero.
For Radio Station :
220,000/(1+i) + 220,000/(1+i)^2 + 220,000/(1+i)^3 + 220,000/(1+i)^4 = 628,100
i = 15%
For TV Station :
440,000/(1+i) + 440,000/(1+i)^2 + 440,000/(1+i)^3 + 440,000/(1+i)^4 = 1,336,280
i = 12%
Using Present Value for an Annuity of $1.
For Radio Station :
220,000 * Present Value of Annuity of $1 at i% = 628,100
Present Value of Annuity of $1 at i% = 2.855
i = 15%
For TV Station :
440,000 * Present Value of Annuity of $1 at i% = 1,336,280
Present Value of Annuity of $1 at i% = 3.037
i = 12%
Answer 4.
The net present value, present value index, and internal rate of return all indicate that the Radio Station is a better financial opportunity compared to the TV Station, although both investments meet the minimum return criterion of 10%.