Alternative Capital Investments The investment 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 $548,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year office Expansion $144,000 Server 1 144,000 $190,000 190,000 190,000 190,000 144,000 144,000 144,000 6 144,000 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 each project's useful life is $0, but 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% 1096 1296 1596 20% 1 0.943 0.893 0.870 0.833 2 0.890 0.909 0.826 0.751 0.797 0.756 0.694 3 0.840 0.712 0.658 0.579 0.482 4 0.792 0.683 0.636 0.572 5 0.747 0.621 0.567 0.497 0.402 0.705 0.507 0.432 0.335 0.564 0.513 0.665 0.452 0.376 0.279 0.23 0.457 0.404 0.327 9 0.627 0.592 0.550 0.361 0.284 0.424 0.386 0.194 0.162 10 0.322 0.247 Present Value of an Annuity of $1 at Compound Taterest Year 699 10% 1296 159 207 0.943 0.900 0.893 0.870 0.630 2 1.833 1.736 1.690 1.626 1.520 2.673 2.487 2.402 2.283 2.105 4 3.465 3.170 3.037 2.855 2589 4.212 5 3.005 2.991 3.353 6 4.917 4.355 4.111 3.785 3325 5.582 4.564 4160 2.005 B 6210 5.335 4.968 4.487 3337 6.602 5.759 5.328 4.030 10 7350 6.145 5.650 5.039 4.192 Required: If required, use the minus sign to indicate a negative net present value. 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 required, round to the nearest dollar. Office Expansion Server Upgrade Present value of annual net cash flows Less amount to be invested Net present value 2. For each project, compute the net present value, assuming that the office expansion is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table above. If required, round to the nearest dollar. Office Expansion Server Upgrade Present value of net cash flow total Less amount to be invested Net present value has a 3. The net present value of the two projects over equal lives indicates that the higher net present value and would be a superior investment