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Alternative capital investments 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. Instructions 1. For each project, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5). (Ignore the unequal lives of the projects.) 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 appearing in this chapter (Exhibit 2). 3. Prepare a report to the investment committee, givingyour adviceontherelative merits of the two projects.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 26, Problem 26.5APR
Textbook Problem

Alternative capital investments

 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.

Instructions

 1.    For each project, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5). (Ignore the unequal lives of the projects.)

 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 appearing in this chapter (Exhibit 2).

 3.    Prepare a report to the investment committee,    givingyour adviceontherelative merits of the two projects.

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Chapter 26 Solutions

Accounting
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