The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade tocomputer servers. The projects have different useful lives, but each requires an investment of $490,000. Theestimated net cash flows from each project are as follows:Year12Year345The committee has selected a rate of 12% for purposes of net present value analysis. It also estimates that theresidual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion'sresidual value would be $180,000.6789101123245630.9430.8900.840Present Value of $1 at Compound Interest6%10%12%0.7920.7470.7050.6650.6270.5920.558Net CashFlowsOfficeExpansion$125,000125,000125,000125,000125,000125,0000.9431.8332.6730.9090.8260.7510.6830.6210.5640.5130.4670.4240.386Net CashFlowsServers$165,000165,000165,000165,0000.9091.7362.4870.8930.7970.7120.6360.5670.5070.4520.4040.3610.3220.8931.69015%2.4020.8700.7560.6580.5720.4970.4320.3760.3270.2840.247Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%20%0.8701.6262.2830.8330.6940.5790.4820.4020.3350.2790.2330.1940.1620.8331.5282.106 Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%123456789100.9431.8332.6733.4654.2124.9175.5826.2106.8027.360Amount to be investedNet present value0.9091.7362.4873.170Amount to be invested3.7914.355Net present value4.8685.3355.7596.1450.8931.6902.4023.0373.605Present value of annual net cash flows4.1114.5644.9685.3285.650Total present value of net cash flow$$0.870$1.626$2.2832.8553.3533.7854.1604.4874.772Required:1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignorethe unequal lives of the projects. If required, round to the nearest dollar.Office Expansion23,875 X5.0190.8331.5282.1062.5892.9913.3263.6053.8374.0314.192490,0002. For each project, compute the net present value, assuming that the office expansion is adjusted to a 4-yearlife for purposes of analysis. Use the present value of $1 table above.Office Expansion23,875 XServers Upgrade4,105 X$11,105 X $490,000490,000$11,105Servers Upgrade4,105 X11,105 X $490,00011,105 X

Net Present value is present value of cash flow minus initial investment.

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 Office Expansion $125,000 125,000 125,000 125,000 125,000 125,000 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. Year 1 2 3 Year 4 5 6 7 8 9 10 1 1 2 2 3 4 5 6 0.943 Present Value of $1 at Compound Interest 6% 10% 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.909 0.826 0.751 0.683 0.621 0.564 0.943 1.833 0.513 0.467 0.424 0.386 Net Cash Flows Servers 0.909 $165,000 165,000 165,000 165,000 1.736 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.893 15% 1.690 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 20% Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.833 0.870 1.626 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 1.528

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 Office Expansion $125,000 125,000 125,000 125,000 125,000 125,000 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. Year 1 2 3 Year 4 5 6 7 8 9 10 1 1 2 2 3 4 5 6 0.943 Present Value of $1 at Compound Interest 6% 10% 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.909 0.826 0.751 0.683 0.621 0.564 0.943 1.833 0.513 0.467 0.424 0.386 Net Cash Flows Servers 0.909 $165,000 165,000 165,000 165,000 1.736 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.893 15% 1.690 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 20% Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.833 0.870 1.626 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 1.528

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 5PA

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