#1 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:

Year	Radio Station		TV Station
1	$430,000		$770,000
2	430,000		770,000
3	430,000		770,000
4	430,000		770,000

Present Value of 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

The radio station requires an investment of $1,113,270, while the TV station requires an investment of $2,198,350. 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.

	Radio Station	TV Station
Present value of annual net cash flows	$	$
Less amount to be invested	$	$
Net present value	$	$

1b. Compute a present value index for each project. If required, round your answers to two decimal places.

	Present Value Index
Radio Station
TV Station

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.

	Radio Station		TV Station
Present value factor for an annuity of $1
Internal rate of return		%		%

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%.

#2 Average Rate of Return Method, Net Present Value Method, and analysis for a Service Company

The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:

	Warehouse					Tracking Technology
Year	Income from Operations		Net Cash Flow			Income from Operations		Net Cash Flow
1	$ 61,400		$135,000			$ 34,400		$108,000
2	51,400		125,000			34,400		108,000
3	36,400		110,000			34,400		108,000
4	26,400		100,000			34,400		108,000
5	(3,600)		70,000			34,400		108,000
Total	$172,000		$540,000			$172,000		$540,000

Each project requires an investment of $368,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

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

Required:

1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.

	Average Rate of Return
Warehouse	%
Tracking Technology	%

1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.

	Warehouse	Tracking Technology
Present value of net cash flow total	$	$
Amount to be invested	$	$
Net present value	$	$

2. The net present value exceeds the selected rate established for discounted cash flows (15%), while the does not. Thus, considering only quantitative factors, the investment should be selected.