Alternative Capital Investments

The investment committee of Shield 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 $1,102,000. The estimated net cash flows from each project are as follows:

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.

	Office Expansion	Server Upgrade
Present value of net cash flow total	$	$
Less amount to be invested	$	$
Net present value	$	$

3. The net present value of the two projects over equal lives indicates that the Selectoffice expansionserver upgradeItem 13 has a higher net present value and would be a superior investment.

Net Cash Flow Year Office Expansiorn Server Upgrade $277,000 277,000 277,000 277,000 277,000 277,000 $366,000 366,000 366,000 366,000 4 6 The committee has selected a rate of 10% 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 $346,000