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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Net present value method, internal rate of return method, and analysis

The management of 1-leckel Communications Inc. is considering two capital investmentprojects. The estimated net cash flows from each project are as follows:

The radio station requires an investment of $1,598800, while the TV station requiresan investment of $3,401,440. No residual value is expected from either project.

Instructions
Compute the following for each project:

a. The net present value. Use a rate of 10% and the present value of an annuity of Si table appearing in this chapter.

b. The present value index. Round to two decimal places.

To determine

Concept Introduction:

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

To Calculate:

The Net Present Value for each project

Explanation

The Net Present value for each project is calculated as follows:

    Radio StationAmount PVF (10%) PV
    A B =A*B
    Annual Net Cash Flows
    Year 1 $ 560,000 0.90909 $ 509,091
    Year 2 $ 560,000 0.82645 $ 462,810
    Year 3 $ 560,000 0.75131 $ 420,736
    Year 4 $ 560,000 0.68301 $ 382,488
    Present Value of Cash Inflow (A) $ 1,775,125
    Investment (B) $ 1,598,800 1...
To determine

Concept Introduction:

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

To Calculate:

The Present Value Index for each project

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