1. Net Present Value Method, A method of analysis of proposed capital investments that uses present value concepts to compute the rate of return from the net cash flows expected from the investment.Internal Rate of Return Method, and Analysis

   The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:

   Year	Radio Station		TV Station
   1	$360,000		$760,000
   2	360,000		760,000
   3	360,000		760,000
   4	360,000		760,000

   Present Value of an Annuity of $1 at Compound Interest
   Year	6%	10%	12%	15%	20%
   1	0.943	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
   5	4.212	3.791	3.605	3.352	2.991
   6	4.917	4.355	4.111	3.784	3.326
   7	5.582	4.868	4.564	4.160	3.605
   8	6.210	5.335	4.968	4.487	3.837
   9	6.802	5.759	5.328	4.772	4.031
   10	7.360	6.145	5.650	5.019	4.192

   The radio station requires an investment of $1,093,320, while the TV station requires an investment of $2,169,800. No residual value is expected from either project.

   Required:

   1a. Compute the net present value for each project. Use a rate of 10% and the The sum of the present values of a series of equal cash flows to be received at fixed intervals.present value of an annuity of $1 in the table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest whole dollar.

   	Radio Station	TV Station
   Present value of annual net cash flows	$	$
   Less amount to be invested	$	$
   Net present value	$	$

   1b. Compute a An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.present value index for each project. If required, round your answers to two decimal places.

   	Present Value Index
   Radio Station
   TV Station

   2. Determine the internal rate of return for each project by (a) computing a present value factor for an A series of equal cash flows at fixed intervals.annuity of $1 and (b) using the present value of an annuity of $1 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest whole percent.

   	Radio Station		TV Station
   Present value factor for an annuity of $1
   Internal rate of return		%		%

   3. The net present value, present value index, and internal rate of return all indicate that the tv station

   • radio station
   • tv station
   is a better financial opportunity compared to the radio station
   • radio station
   • tv station
   , although both investments meet the minimum return criterion of 10%.

   Feedback

   1a. For each project, multiply the annual net cash flow by the present value of an annuity factor for 4 periods at 10% (Exhibit 5). Subtract the amount to be invested.

   1b. Divide the total present value of the net cash flow by the amount to be invested.

   2. Divide the amount to be invested by the annual net cash flow. In Exhibit 5 find the discount rate that is associated with this factor at four years.

   3. Consider why the internal rate of return helps in comparing projects.

   Learning Objective 3.

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