Question

Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows: Year After Hours Sun Fun 1 $320,000 $290,000 2 320,000 290,000 3 320,000 290,000 4 320,000 290,000 After Hours requires an investment of $913,600, while Sun Fun requires an investment of $880,730. No residual value is expected from either project. Present Value of an Annuity of $1 at Compound Interest 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: 1a. Compute the net present value for each project. Use a rate of 10% and the present value of an annuity of $1 in the above table. If required, round to the nearest dollar.

Answer 1

The net present value (NPV) for each project for After Hours project is $1,744,640 and the NPV for Sun Fun project is $1,523,980 , calculate the present value (PV) of the net cash flows and subtract the initial investment. Use the present value of an annuity table to find the PV factor for each year. Multiply the net cash flows by the PV factor for each year, sum them up, and subtract the initial investment to get the NPV.

To compute the net present value (NPV) for each project, we need to calculate the present value (PV) of the net cash flows and subtract the initial investment. Using a 10% interest rate, we can use the present value of an annuity table to find the PV factor for each year. Then, we multiply the net cash flows from each year by the PV factor and sum them up. Finally, we subtract the initial investment to get the Net Present Value.

For After Hours project:

1. Calculate PV for each year:
2. Sum up the PVs: $290,880 + $557,120 + $795,840 + $1,014,400 = $2,658,240
3. Subtract initial investment: $2,658,240 - $913,600 = $1,744,640

Similarly, for Sun Fun project:

1. Calculate PV for each year:
2. Sum up the PVs: $263,610 + $503,440 + $719,230 + $918,430 = $2,404,710
3. Subtract initial investment: $2,404,710 - $880,730 = $1,523,980

So, the NPV for After Hours project is $1,744,640 and the NPV for Sun Fun project is $1,523,980.