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PR 26-5A Alternative capital investments The investment committee of Sentry Insurance Co. is evaluating two projects, office ex- pansion 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: OBJ. 3, 4 r upgrade, cel 1305 Chapter 26 Capital Investment Analysis Net Cash Flows Year Office Expansion Servers $125,000 $165,000 165,000 165,000 165,000 125,000 125,000 125,000 125,000 125,000 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 $180,000. Instructions 1. For each project, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5). (Ignore the unequal lives of the projects.) 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 appearing in this chapter (Exhibit 2). committee, investment committee, giving your advice on the 3.Prepare a report to the relative merits of the two projects. Present Value of $1 at Compound Interest EXHIBIT 2 Partial Present Value of $1 Table 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 1 096 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 Year 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 20% 0833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.247 lo ! Conditional Format Copy so It s-% , Merge & Center A- 00 + Paste Formatting Table s Format Painter Styles Number Alignment Font Clipboard C3 D I A B 31 32 2. Net Present Value Analysis Present Value of Net Cash Flow 34 35 36 37 38 39 40 41 42 43 Net Cash Flow Present Value of $1 at 12% 0.893 Server Upgrade Office Expansion Office Expansion Server Upgrade Year 1 Year 2 Year 3 Year 4 Year 4 (resid. value) Total Amount to be invested Net present value 0.797 0.712 0.636 45 46 47 48 3. 49 50 [Key essay answer here 52 53 54 Pr. 26-5A Edit O Type here to search