The investment committee of Heartland Insurance Co. is evaluating two projects. The projects have different useful lives, but each requires an investment of $200,000. The estimated net cash flows from each project are as follows:

The committee has selected a rate of 15% 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, Project I’s residual value would be $140,000.

Instructions
1. For each project, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter. (Ignore the unequal lives of the projects.)
2. For each project, compute the net present value, assuming that Project I is adjusted to a 4-year life for purposes of analysis. Use the present value of $1 table appearing in this chapter.
3. Prepare a report to the investment committee, providing your advice on the relative merits of the twoprojects.

Transcribed Image Text:

Net Cash Flows Year Project Project II $65,000 $97,500 65,000 65,000 65,000 65,000 97,500 65,000 97,500 97,500