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 $496,000. The estimated net cash flows from each project are as follows:

Net Cash Flow Year Office Expansion Server Upgrade $130,000 130,000 130,000 130,000 130,000 130,000 $172,000 172,000 172,000 172,000 2 4 6 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 $163,000 Present Value of $1 at Compound Interest 10% 12% 0.893 0.890 0.826 0.7970.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 Year 690 15% 20% 0.943 0.909 0.870 0.833 2 6 8 0.247