Alternative Capital Investments The investment committee of Sentry Insurance Co. s 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 Year Office Expansion Servers $165,000 $125,000 125,000 165,000 125,000 165,000 125,000 165,000 125,000 125,000 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 each project's useful life is s0, but present 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% 10.943 0.909 0.893 0.870 0.833 2 0.890 0826 0.797 0.756 0.69 3 0.840 0.7510.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0402 0.70s 0.564 0.5070432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0233 Check My Work 10 more Check My Work uses remaning Previous Print Item 0.627 0.467 0.404 0.3270.233 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% 10.943 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 4.212 3.791 3.605 3.353 2.991 6 4917 4.355 4.1113.785 3.326 7 5.582 4.868 4.5644.1603.605 8 6.210 .335 460 4487 3.837 9 6.802 .759 5.3284.772 4.031 10 7.360 .145 5.650 5019 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 required, round to the nearest doliar Office Expansion Server Upgrade Present value of anvual net cash flows Less amount to be invested Net present value 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 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 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 a four-year life for purposes of analysis. Use the present value of $ 2. For each project, compute the net present value, assuming that the office expansion is adjusted to table above Office Expansion Server Upgrade Present value of net cash flow total Less amount to be invested Net present value has a higher net present value and would be a superior investment 3. The net present value of the two projects over equal lives indicates that the
