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Net Present Value Method,Internal Rate of Return Method, and Analysis

The management of Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows:

After Hoursrequires an investment of $913,600, whileSun Funrequires an investment of $880,730. No residual value is expected from either project.

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

Required:

1a. Compute the net present value for each project. Use a rate of 10% and thepresent value of an annuityof $1 in the above table. If required, round to the nearest dollar.

	After Hours	Sun Fun
Present value of annual net cash flows	$	$
Less amount to be invested	$	$
Net present value	$	$

1b. Compute apresent value indexfor each project. If required, round your answers to two decimal places.

	Present Value Index
After Hours
Sun Fun

2. Determine the internal rate of return for each project by (a) computing a present value factor for anannuityof $1 and (b) using the present value of an annuity of $1 table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.

	After Hours	Sun Fun
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 theSelectAfter HoursSun FunItem 13TV show is a better financial opportunity compared to theSelectAfter HoursSun FunItem 14TV show, although both investments meet the minimum return criterion of 10%.

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1a. For each project, multiply the annual net cash flow by the present value of an annuity factor for 4 periods at 10% (Exhibit 2). Subtract the amount to be invested.

1b. Divide the total present value of the net cash flow by the amount to be invested.

2. Divide the estimated cost by the annual net cash flow. InExhibit 2find the discount rate that is associated with this factor at four years.

3. Consider why the internal rate of return helps in comparing projects.

Learning Objective 3.