1. 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:

   		Net Cash Flows
   Year		Office Expansion		Servers
   1		$125,000		$165,000
   2		125,000		165,000
   3		125,000		165,000
   4		125,000		165,000
   5		125,000
   6		125,000

   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.

   Present Value of $1 at Compound Interest
   Year	6%	10%	12%	15%	20%
   1	0.943	0.909	0.893	0.870	0.833
   2	0.890	0.826	0.797	0.756	0.694
   3	0.840	0.751	0.712	0.658	0.579
   4	0.792	0.683	0.636	0.572	0.482
   5	0.747	0.621	0.567	0.497	0.402
   6	0.705	0.564	0.507	0.432	0.335
   7	0.665	0.513	0.452	0.376	0.279
   8	0.627	0.467	0.404	0.327	0.233
   9	0.592	0.424	0.361	0.284	0.194
   10	0.558	0.386	0.322	0.247	0.162

   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	3.353	2.991
   6	4.917	4.355	4.111	3.785	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

   Required:

   1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If required, round to the nearest dollar.

   	Office Expansion	Server Upgrade
   Present value of annual net cash flows	$	$
   Less amount to be invested
   Net present value	$	$

   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 above.

   	Office Expansion	Server Upgrade
   Present value of net cash flow total	$	$
   Less amount to be invested
   Net present value	$	$

   3. The net present value of the two projects over equal lives indicates that the has a higher net present value and would be a superior investment.

   Feedback

   1. For each project, multiply the annual net cash flow by the present value of an annuity factor (6 periods at 12% for office expansion; 4 periods at 12% for server upgrade; Refer Exhibit 5 in the text.). Subtract the amount to be invested.

   2. For each proposal, multiply the present value factor by the net cash flow, including the residual value for office expansion. Subtract the amount to be invested from the total present value of the net cash flow.

   3. Compare over equal lives.