Question

PR 26-5A Alternative capital investments OBJ. 3, 4 1. Server upgrade, The investment committee of Sentry Insurance Co. is evilfferent usef $11,105 office ex- project pansion and upgrade to computer servers. The projects lives, ful each requires an investment of $490,000. The estimated net cash are as follows: flows from 1305 Chapter 26 Capital Investment Analysis Net Cash Flows Office Expansion Servers $125,000 $16000 25,000 165,000 165,000 125,000 125,000 125,000 The committee has selected a rte 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 s0, but at the end of the fourth year, the office expansion's residual value would be $180,000. Instructions 1. For each project, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5). (Ignore the unequal lives of the projects.) 2. For each project, compute the net present value, assuming that the office expansion is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table appearing in this chapter (Exhibit 2) Prepare a report to the investment committee, giving your advice on the relative merits of the two projects.

Answer 1

1. Provided both answers in one sheet

Key Issues

Office Expansion

Merits

1. This expansion will provide $125000 every year which provides Positive NPV as per the above calculation. Its better to use the office equipment for 6 years as it provides more NPV

Server Upgrade

Merits

1. This expansion will provide $165000 every year which provides Positive NPV as per the above calculation.