Net Present Value Method. Internad Rate of Ritum Hethod, and Anah management of

Question

Net Present Value Method. Internad Rate of Ritum Hethod, and Anah management of Quest Media inc. is considering tso capital investment projects. The estimated net cash fows from each project are as folows TV Station Year Radio Station 180,000 180,000 320,000 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.8930.8700.833 2 1.833 1.736 1690 1.6261.52 3 2.673 2.487 2.4022.232.10 4 3.465 3.1703.037 2855 5 4.212 3. 3.405 3.352 2.99 6 4917 4.355 44113.7943.326 7 5.582 468 4564 4.160 605 2.589 6.210 5.335 4.968 4.467 3.837 9 6.802 5.7595.328 4.72 4.3 10 7.360 6.145 5.650 5.019 4.192 The radio station requires an investment of $546,660, while the TV station requires an investmest of $913,600. No resifual vakue is expected from either project

Explanation / Answer

1a.

Present value of Radio stations = Annual cash inflow*Cumulativepresent value factor(10%,4years)

= $180,000* 3.170

= $570,600

Present value of TV station cash inflows = $320,000*3.170

= $1,014,400

1b. Present value index of each project

Radio stations = NPV/Cost of investment

= $23,940/ $546,660 = 0.0437 or 4.379%

TV Stations = $100,800/ $913,600 = 0.1103 or 11.03%

2.

Radio stations = cost/annual cash flow = $546,660/$180,000

= 3.037

TV Stations = $913,600/ $320,000 = 2.855

Radio station TV Station Present value of annual net cash flows 570,600 1,014,400 Less amount to be invested 546,660 913,600 Net present value 23,940 100,800

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