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Obj. 3, 4 The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different
Obj. 3, 4 The investment committee of Sentry 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 $490,000. The estimated net cash flows from each project are as follows: 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 vear, the office expansion's residual value would be $180,000. 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 table appearing in Exhibit 5 of this chapter. Ignore the unequal lives of the projects. Answer: Check Figure: Servers, $11,105 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 table appearing in Exhibit 2 of this chapter. 3. Prepare a report to the investment committee, providing your advice on the relative merits of the two projects. 1. Net Present Value Analysis Office Expansion: Annual net cash flow (at the end of each of 6 years) Present value of an annuity of $1 at 12% for 6 years (Exh. 5) Present value of annual net cash flows Amount to be invested Net present value Server Upgrade: Annual net cash flow (at the end of each of 4 years) Present value of an annuity of $1 at 12% for 4 years (Exh. 5 ) Present value of annual net cash flows Amount to be invested Net present value 2. 3. [Key essay answer here]
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