Net Present Value Method, Internal Rate of Return Method, and Analysis The manag
ID: 2587845 • 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 $999,250, while the TV station requires an investment of $1,734,630. 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 $350,000 $670,000 2 350,000 670,000 3 350,000 670,000 4 350,000 670,000Explanation / Answer
Answer 1 Computation the net present value for each project. Radio Station TV Station Present value of annual net cash flows - $350000 * 3.170 $1,109,500 - $670000 * 3.170 $2,123,900 Less amount to be invested $999,250 $1,734,630 Net Present Value $110,250 $389,270 Answer 1b Computation of present value index for each project Present Value index = Present value of annual net cash flows / Amount to be invested Radio Station TV Station Present value of annual net cash flows $1,109,500 $2,123,900 / amount to be invested $999,250 $1,734,630 Present Value Index 1.11 1.22 Answer 2 Determine the internal rate of return for each project Radio Station TV Station Present value factor for an annuity of $1 2.855 2.589 IRR 15% 20% At IRR , NPV is equal to zero. Present value factor for an annuity of $1 for Radio Station = Initial Investment / Annual net cash flow = $999250 / $350000 = 2.855 Present value factor for an annuity of $1 for TV Station = Initial Investment / Annual net cash flow = $1734630 / $670000 = 2.589 Answer 3 The net present value, present value index, and internal rate of return all indicate that the TV Station Investment is a better financial opportunity compared to the Radio Statio Investment , although both investments meet the minimum return criterion of 10%.