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 | 350,000 | 700,000 |
| 2 | 350,000 | 700,000 |
| 3 | 350,000 | 700,000 |
| 4 | 350,000 | 700,000 |
The radio station requires an investment of $999,250,while the TV station requires an investment of $2,125,900.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 appearing in this chapter.
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?
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