Net Present Value Method, Internal Rate of Return Method, and
Analysis

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Question: Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Me…
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The management of Quest Media Inc. is considering two capital
investment projects. The estimated net cash flows from each project
are as follows:

Year Radio Station TV Station
1 $360,000 $680,000
2 360,000 680,000
3 360,000 680,000
4 360,000 680,000
Present Value of an Annuity of $1 at
Compound 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 $1,027,800, while
the TV station requires an investment of $2,065,160. No residual
value is expected from either project.

Required:

1a. Compute the net present value for each
project. 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 indicate
a negative net present value. If required, round to the nearest
whole 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 each
project. If required, round your answers to two decimal places.

Present Value Index
Radio Station
TV Station

2. Determine the internal rate of return for
each project by (a) computing a present value factor for an annuity
of $1 and (b) using the present value of an annuity of $1 in the
table above. If required, round your present value factor answers
to three decimal places and internal rate of return to the nearest
whole 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 radio
station is a better financial opportunity compared to the
tv station , although both investments meet the
minimum return criterion of 10%.

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