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.