**Project Evaluation of Office Expansion and Server Upgrade at Sentry Insurance Co.**The investment committee of Sentry Insurance Co. is evaluating two projects: office expansion and the upgrade of computer servers. Each project has different useful lives but requires an investment of $490,000. Below are the estimated net cash flows for each project:| Year | Net Cash Flows Office Expansion | Net Cash Flows Servers ||:----:|:-------------------------------:|:----------------------:|| 1 | $125,000 | $165,000 || 2 | 125,000 | 165,000 || 3 | 125,000 | 165,000 || 4 | 125,000 | 165,000 || 5 | 125,000 | || 6 | 125,000 | |The committee has selected a rate of 12% for the purpose of net present value (NPV) analysis. It also estimates that the residual value at the end of each project's useful life is $0. However, at the end of the fourth year, the office expansion's residual value would be $180,000.### Present Value TablesTo assist with the NPV calculations, the following are the present value tables for $1 at compound interest and for an annuity of $1 at different interest rates:#### Present Value of $1 at Compound Interest| Year | 6% | 10% | 12% | 15% | 20% ||:----:|:----:|:----:|:----:|:----:|:----:|| 1 | 0.943| 0.909| 0.893| 0.870| 0.833|| 2 | 0.890| 0.826| 0.797| 0.756| 0.694|| 3 | 0.840| 0.751| 0.712| 0.658| 0.579|| 4 | 0.792| 0.683| 0.636| 0.572| 0.482|| 5 | 0.747| 0.621| 0.567| 0 ### Present Value of an Annuity of $1 at Compound InterestThis table depicts the present value of an annuity of $1 at various compound interest rates over different time periods.| Year | 6% | 10% | 12% | 15% | 20% ||------|------|------|------|------|------|| 1 | 0.943| 0.909| 0.893| 0.870| 0.833|| 2 | 1.833| 1.736| 1.690| 1.626| 1.528|| 3 | 2.673| 2.487| 2.402| 2.283| 2.106|| 4 | 3.465| 3.170| 3.037| 2.855| 2.589|| 5 | 4.212| 3.791| 3.605| 3.353| 2.991|| 6 | 4.917| 4.355| 4.111| 3.785| 3.326|| 7 | 5.582| 4.868| 4.564| 4.160| 3.605|| 8 | 6.210| 5.335| 4.968| 4.487| 3.837|| 9 | 6.802| 5.759| 5.328| 4.772| 4.031|| 10 | 7.360| 6.145| 5.650| 5.019| 4.192|#### Required Task**1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If required, round to the nearest dollar.**The first set of calculations involves two projects:- Office Expansion- Servers UpgradeFor each project, the following parameters are given:- Present value of annual net cash flows- Amount to be invested- Net present value**Office Expansion**- Present value of annual net cash flows: $23,875- Amount to be invested: $

Net Present value is present value of cash flow minus initial investment.

The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $490,000. The estimated net cash flows from each project are as follows: Net Cash Flows Office Expansion $125,000 125,000 125,000 125,000 125,000 125,000 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, the office expansion's residual value would be $180,000. Year 1 2 3 Year 4 5 6 7 8 9 10 1 1 2 2 3 4 5 6 0.943 Present Value of $1 at Compound Interest 6% 10% 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.909 0.826 0.751 0.683 0.621 0.564 0.943 1.833 0.513 0.467 0.424 0.386 Net Cash Flows Servers 0.909 $165,000 165,000 165,000 165,000 1.736 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.893 15% 1.690 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 20% Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.833 0.870 1.626 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 1.528

The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $490,000. The estimated net cash flows from each project are as follows: Net Cash Flows Office Expansion $125,000 125,000 125,000 125,000 125,000 125,000 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, the office expansion's residual value would be $180,000. Year 1 2 3 Year 4 5 6 7 8 9 10 1 1 2 2 3 4 5 6 0.943 Present Value of $1 at Compound Interest 6% 10% 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.909 0.826 0.751 0.683 0.621 0.564 0.943 1.833 0.513 0.467 0.424 0.386 Net Cash Flows Servers 0.909 $165,000 165,000 165,000 165,000 1.736 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.893 15% 1.690 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 20% Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.833 0.870 1.626 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 1.528

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $34,000 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,000 $22,000 $5,000 $59,000 Beta Project 8,000 23,500 28,000 59,500 Present value and future values table: https://openstax.org/books/principles-managerial-accounting/pages/time-value-of-money A. If the discount rate is 12%, compute the NPV of each project. Round your present value factor to three decimal places and final answer to answer to 2 decimal places. Alpha Project $_________ Beta Project $________ B. Which project should be recommended. _____________
Walsh Company is considering three independent projects, each of which requires a $3 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Cost of capital Project M (medium risk): Project L (low risk): Cost of capital Cost of capital = 15% = 11% = 8% IRR = 19% IRR = 12% IRR = 7% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 50% debt and 50% common equity, and it expects to have net income of $4,443,000. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places. %
A company is intending to invest in a capital budgeting project to manufacture a medical testing device and has projected the following sales: Year 1 Year 2 Year 3 Year 4 Year 5 50,000 66,400 81,200 68,500 54,500 The installed cost of the new assets will be $18,500,000 which will be depreciated using the 7-year MACRS schedule. The assets will have a salvage value of $3,700,000. Initial NWC requirements are $1,500,000 and additional working capital needs are estimated to be 15% of the projected sales increases for the following year. Total fixed costs are $2,000,000 per year. The medical device has a selling price of $300 per unit and variable production costs are $175. The firm has a marginal tax rate of 35% and a required rate of return of 18%. Analyze this project and give your recommendation as to whether they should invest in it or…
Bridgeport Company has hired a consultant to propose a way to increase the company's revenues. The consultant has evaluated two mutually exclusive projects with the following information provided for each: Capital investment Annual cash flows Estimated useful life Project Turtle $1,125,000 184,000 10 years Project Snake $645,000 109,000 10 years Bridgeport Company uses a discount rate of 9% to evaluate both projects.
Consider how Root Valley River Park Lodge could use capital budgeting to decide whether the $13,000,000 River Park Lodge expansion would be a good investment. Assume Root Valley's managers developed the following estimates concerning the expansion: (Click the icon to view the estimates.) (Click the icon to view additional information.) The internal rate of return (IRR) of the expansion is Data table More info example 10-12% Number of additional skiers per day Average number of days per year that weather conditions allow skiing at Root Valley Useful life of expansion (in years) Average cash spent by each skier per day Average variable cost of serving each skier per day Cost of expansion Discount rate Get more help. 12-14% Print 15-16% 16-18% S Done 122 skiers 149 days Assume that Root Valley uses the straight-line depreciation method and expects the lodge expansion to have no residual value at the end of its nine-year life. The project is expected to have an average annual net cash…
Since the beginning of the fiscal year 2009, Texas Department of Transportation invest one million each year to build up the transportation management database system in one of the Southern Texas city regions. TxDot is planning to transfer this database system to the city authority by the end of the fiscal year 2020. If the rate of return is 12% per year during the investment period, what is the total value of this database system when transferring?
Providence Health is evaluating two different linen supply vendors systems for handling facility linen replacement. There are no incremental revenues attached to the projects, so the decision will be made on the basis of the present value of costs. Providence's weighted average cost of capital is 6.25%. Here are the net cash flow estimates in thousands of dollars: Year 0 1 2 3 4 5 System X System Y S (1,800) $ (3,850) S (1,000) S (500) (1,000) S (500) S S (1,000) S S (1,000) S S (1,000) S (500) (500) (500) [a] Assume initially that the systems both have average risk. Which one should be chosen? [b] Assume that System Y is judged to have high risk. The organization accounts for differential risk by adjusting its corporate cost of capital
You have been tasked with recommending one of the two investment projects for acceptance by your company. Project 1 costs $100,000 to implement today (it is a cost), it will bring subsequent positive cash flows of $50,000 at the end of year one; and subsequently $30,000; $45,000; $8,000. Project 2 initial cost is $14,000, and subsequent cash flows are $7,000 per year for 3 years. Your company is using WACC of14% for both projects. a. Calculate NPV and IRR for each project, and decide which one to recommend. b. Calculate MIRR for projects A and B. Which project would you recommend based on MIRR? c. Find the crossover rate. What does this rate represent? Describe in YOUR OWN words.
The Fritz Co. is considering a new project and asked the chief accountant to review potential changes to the net working capital accounts should the project be adopted. The accountant’s report is as follows: Current Projected Inventory $ 99,218 $ 75,000 Accounts receivable $ 89,430 $110,000 Accounts payable $ 58,640 $ 50,000 What amount should be included in the initial cash flow of the project for net working capital?
Haukea Clothing Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of $200,000 and each with an eight-year life and expected total net cash flows of $320,000. Location 1 is expected to provide equal annual net cash flows of $40,000, and Location 2 is expected to have the following unequal annual net cash flows: Year Amount Year AmountYear 1 $78,000 Year 5 $42,000Year 2 58,000 Year 6 34,000Year 3 38,000 Year 7 24,000Year 4 26,000 Year 8 20,000Determine the cash payback period for both location proposals. Location YearLocation 1 yearsLocation 2 years
Goergen Corporation is considering a capital budgeting project that would require an initial investment of $700,000. The investment would generate annual cash inflows of $267,000 for the life of the project, which is 4 years. The company's discount rate is 10%. The net present value of the project is closest to: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice $368,000 $700,000 $846,123 $146,123
The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $1,104,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year OfficeExpansion Server 1 $308,000 $407,000 2 308,000 407,000 3 308,000 407,000 4 308,000 407,000 5 308,000 6 308,000 The committee has selected a rate of 15% 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, the office expansion's residual value would be $385,000. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5…