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 $1,281,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year Office Expansion Server $336,000 $444,000 444,000 444,000 336,000 336,000 336,000 336,000 336,000 444,000 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 $420,000. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.890 0.833 0.694 0.870 0.756 0.658 0.572 0.579 0.840 0.792 0.747 0.482 0.497 0.402 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.705 0.335 0.279 0.665 0.627 0.592 0.558 0.432 0.376 0.327 0.284 0.247 0.233 0.194 0.162 20% Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 0.943 0.909 0.893 0.870 0.833 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.352 2.991 4.917 4.355 4.111 3.784 3.326 5.582 4.868 4.564 4.160 3.605 6.210 5.335 4.968 4.487 3.837 6.802 5.759 5.328 4.772 4.031 7.360 6.145 5.650 5.019 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. Present value of annual net cash flows Office Expansion $ 1,381,296 $ 1,281,000 $ 100,296 Server Upgrade 1,348,428 1,281,000 67,428 $ $ $ 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. Office Expansion Server Upgrade Present value of net cash flow total $ 1,287,888 $ Less amount to be invested $ 1,281,000 $ 1,281,000 Net present value 6,888 $