# the investment committee of safe hands insurance co is evaluating two projects the p 666155

The investment committee of Safe Hands Insurance Co. is evaluating two projects. The projects have different useful lives, but each requires an investment of \$225,000. The estimated net cash flows from each project are as follows:

 Net Cash Flows Year Project I Project II 1 \$70,000 \$98,000 2 70,000 98,000 3 70,000 98,000 4 70,000 98,000 5 70,000 6 70,000

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, Project I’s residual value would be \$150,000.

Instructions

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

2. For each project, compute the net present value, assuming that Project I is adjusted to a four year life for purposes of analysis. Use the present value of \$1 table appearing in this chapter.

3. Prepare a report to the investment committee, providing your advice on the relative merits of the two projects.