CengageNOWv2, 1 term Printed Access Card for Warren's Survey of Accounting, 8th
8th Edition
ISBN: 9781305961982
Author: Carl Warren
Publisher: Cengage Learning
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Question
Chapter 15, Problem 15.4.1P
To determine
Concept Introduction:
NPV:
To Calculate:
The Net Present Value for each project
Expert Solution
Answer to Problem 15.4.1P
The Net Present value for each project for each project is as follows:
| Net Present Value | |
| Radio Station | $ 176,325 |
| TV Station | $ 148,809 |
Explanation of Solution
The Net Present value for each project is calculated as follows:
| Radio Station | Amount | 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 | $ 1,775,125 | ||
| Investment (B) | $ 1,598,800 | 1.00000 | $ 1,598,800 |
| Net Present Value (A-B) | $ 176,325 | ||
| TV Station | Amount | PVF (20%) | PV |
| A | B | =A*B | |
| Annual Net Cash Flows | |||
| Year 1 | $ 1,120,000 | 0.90909 | $ 1,018,182 |
| Year 2 | $ 1,120,000 | 0.82645 | $ 925,620 |
| Year 3 | $ 1,120,000 | 0.75131 | $ 841,473 |
| Year 4 | $ 1,120,000 | 0.68301 | $ 764,975 |
| Present Value of Cash Inflow (A) | $ 3,550,249 | ||
| Investment (B) | $ 3,401,440 | 1.00000 | $ 3,401,440 |
| Net Present Value (A-B) | $ 148,809 |
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:
To Calculate:
The Present Value Index for each project
Expert Solution
Answer to Problem 15.4.1P
The Present Value Index for each project is as follows:
| Present Value Index | |
| Radio Station | 1.11 |
| TV Station | 1.04 |
Explanation of Solution
The Present Value Index for each project is calculated as follows:
| Radio Station | Amount | 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 | 1.00000 | $ 1,598,800 |
| Present Value Index (A/B) | 1.11 | ||
| TV Station | Amount | PVF (20%) | PV |
| A | B | =A*B | |
| Annual Net Cash Flows | |||
| Year 1 | $ 1,120,000 | 0.90909 | $ 1,018,182 |
| Year 2 | $ 1,120,000 | 0.82645 | $ 925,620 |
| Year 3 | $ 1,120,000 | 0.75131 | $ 841,473 |
| Year 4 | $ 1,120,000 | 0.68301 | $ 764,975 |
| Present Value of Cash Inflow (A) | $ 3,550,249 | ||
| Investment (B) | $ 3,401,440 | 1.00000 | $ 3,401,440 |
| Present Value Index (A/B) | 1.04 |
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The wind turbines require an investment of $887,600, while the biofuelequipment requires an investment of $911,100. No residual value isexpected from either project.Instructions1. Compute the following for each project:a. The net present value. Use a rate of 6% and the present value of anannuity of $1 table appearing in this chapter (Exhibit 5).b. A present value index. Round to two decimal places.2. Determine the internal rate of return for each projectby (a)computing a present value factor for an annuity of $1 and (b) using thepresent value of an annuity of $1 table appearing in this chapter (Exhibit 5).3. What advantage does the internal rate of return method have over then net present value method in comparing projects ?
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1
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Chapter 15 Solutions
CengageNOWv2, 1 term Printed Access Card for Warren's Survey of Accounting, 8th
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