Net Present Value Method, Internal Rate of Return Method, andAnalysis
The management of Quest Media Inc. is considering two capitalinvestment projects. The estimated net cash flows from each projectare as follows:
| Year | Radio Station | TV Station |
| 1 | $340,000 | | $710,000 | |
| 2 | 340,000 | | 710,000 | |
| 3 | 340,000 | | 710,000 | |
| 4 | 340,000 | | 710,000 | |
| Present Value of an Annuity of $1 atCompound 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 $970,700, while theTV station requires an investment of $1,838,190. No residual valueis expected from either project.
Required:
1a. Compute the net present value for eachproject. Use a rate of 10% and the present value of an annuity of$1 in the table above. If required, use the minus sign to indicatea negative net present value. If required, round to the nearestwhole dollar.
| Radio Station | TV Station |
| Present value of annual net cash flows | $ | $ |
| Less amount to be invested | $ | $ |
| Net present value | $ | $ |
1b. Compute a present value index for eachproject. If required, round your answers to two decimal places.
| Present Value Index |
| Radio Station | |
| TV Station | |
2. Determine the internal rate of return foreach project by (a) computing a present value factor for an annuityof $1 and (b) using the present value of an annuity of $1 in thetable above. If required, round your present value factor answersto three decimal places and internal rate of return to the nearestwhole 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 tvstation is a better financial opportunity compared tothe radio station , although both investments meet the minimumreturn criterion of 10%.
