CH 25-5

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 $1,439,000. The estimated net cash flows from each project are as follows:

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 $453,000.

If required, use the minus sign to indicate a negative net present value.