Alternative Capital Investments The i nvestment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $490,000. The estimated net cash flows from each project are as follows Net Cash Flows Office Expansion $125,000 125,000 125,000 $165,000 165,000 165,000 The committee has selected a rate of 12% for purposes of net prese" value analyss. Italso estimates that the residual value at the end of each project's useu is $0; but at the end of the fourth year, the omce expansion's residual value would be $180,000. Presenf Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.9434 0.9091 0.8929 0.8696 0.8333 2 0.8900 0.8265 0.7972 0.7561 0.6944 3 0.8396 0.7513 0.7118 0.6575 0.5787 4 0.7921 0.6830 0.6355 0.5718 0.4823 0.7473 0.6209 0.5674 0.4972 0.4019 6 0.70s0 0.5645 05066 0.4323 0.3349 06651 0.5132 0.4523 0.3759 0.2791 0.6274 0.4665 0.4039 0.3269 0.2326 .5919 04241 0.3606 0.2843 0.1938 v 7 9.6651 05132 0.4523 0.3759 02791 95274 0465s 04039,326332 0.5919 04241 0.306 0.2843 01938 10 0.5584 0.3855 0.3222472 0.1615 Present Value of an Annuity of $1 et Compound Interest Year 6% 10% 12% 15% 20% 10.9434 0.9091 08929 069 08333 2 1.8334 1.7355 16901 16257 1.5278 32.6730 2.4868 2.4018 2.2832 2.1065 4 3.4651 3.1699 3.0374 2.8550 2.587 )S4.2124 3.7908 3.6048 33522 2.9906 4.9173 4.3553 4.1114 3.7845 3.325 7 5.5824 48684 45638 4.1604 36046 6.200 $334949676 44873 3.8372 9 6.8017 5.7590 5.3283 47716 40301 10 73601 61446 .6502 50188 4.1923 Required: $1tale above Ignare the unequal lives of the proects it equired, round to the nearest do 1 For each project, compute the net present value Use the present value of an anuity of Office ExpansionServer Upgrade 513,925 Pr nt ae of annual net cash flows Less amount to be invested Net present value 490,000) v 490,000 V 23.925 PrevicusNet 590 5.3283 4.7716 10 73601 6.1446 5.6502 5.0188 .1923 Required 1. For each project, compute the net present value. annuity of s1 table above. Ignore the unequal Use the present value of an lives of the prejects. If required, round bo the nearest dollar Office Expanslion Server Upgrade Present value of annual net cash flows Less amount to be invested Net present value 13,925 490,000490,000 23,925 For each project, compute the net present vove, assuming that the once expansion is adjusted to a fouryer re for purposes of ryy 2. Use the value of ,1 tate ao. Office Expansion Server Upgrade Present value of net cash flow total Net present value 3. The net present value of the two projects over equal lives indicates that the server upgrade has a higher net present value and would be a superior ievestment. 2. For each proposal, matiply the factor by the net cash ow, including the residual vaue forofficeexpenision Subtract the amoust to be invese from the tresent value of he n 3. Compare over equal Eves Leaming Objective 3, Leaming Objective 4 cash ow