Alternative capital investments The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The requires an investment of $490,000. The estimated net cash flows from each project are as follows Net Cash Flows Net Cash Flows Office Servers Year Expansion 1 $125,000 $165,000 2 125,000 165,000 3 125,000 165,000 4 125,000 165,000 5 125,000 6 125,000 The committee has selected a rate of 12% for purposes of net present value analysis. It also estimates that the residual value at the end of the fourth year, the office expansion's residual value would be $180,000. 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 Print Item 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 4 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 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 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4968 4.564 4.160 3.605 Check My Work uses remaining 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 10 7.360 6.145 5.328 4.772 4.031 5.650 5.019 4.192 Required: 1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If re dollar. Office Expansion Servers Upgrade Present value of annual net cash flows Amount to be invested 490,000 490,000 Net present value 2. For each project, compute the net present value, assuming that the office expansion is adjusted to a 4-year life for purposes of analysis. Use the pres Total present value of net cash flow Amount to be invested Net present value Office Expansion 490,000 Servers Upgrade 490,000 3. The net present value of the two projects over equal lives indicates that the server upgrade has a higher met present value and would be a s 3.605 3.837 4.031 4.192 Use the present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If required, round to the nearest Expansion Servers Upgrade 490,000 490,000 assuming that the office expansion is adjusted to a 4-year life for purposes of analysis. Use the present value of $1 table above. Expansion Servers Upgrade 490,000 490,000 qual lives indicates that the server upgrade has a higher net present value and would be a superior investment. urance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each e estimated net cash flows from each project are as follows: Cash OWS vers 5,000 5,000 5,000 5,000 % for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the on's residual value would be $180,000. bound Interest 15% 20% 0.870 0.833 0.756 0.694 0.658 0.579 0.572 0.482 Previous