Response to the following problem:
The management of Heckel Communications Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:
|
Year
|
Radio Station
|
TV Station
|
|
1
|
$560,000
|
$1,120,000
|
|
2
|
560,000
|
1,120,000
|
|
3
|
560,000
|
1,120,000
|
|
4
|
560,000
|
1,120,000
|
The radio station requires an investment of $1,598,800, while the TV station requires an investment of $3,401,440. No residual value is expected from either project.
Instructions
1. Compute the following for each project:
a. The net present value. Use a rate of 10% and the present value of an annuity of $1 table .
b. A present value index. Round to two decimal places.
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 table appearing in this chapter.
3. What advantage does the internal rate of return method have over the net present value method in comparing projects?