The net present value of each project to be embarked upon by Style Networks Inc. is as follows:
After Hours Sun Fun
Net present value $100,800 $38,570
How the net present value is computed:
Estimated net cash inflows:
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
Expected cash outflows:
After Hours = $913,600
Sun Fun = $880,730
Interest rate = 10%
Present value annuity factor of 10% for 4 years = 3.170
Present value of annual net cash flow:
After Hours = $320,000 x 3.170 = $1,014,400
Sun Fun = $290,000 x 3.170 = $919,300
After Hours Sun Fun
Present value of annual net cash flow $1,014,400 $919,300
Less amount to be invested $913,600 $880,730
Net present value $100,800 $38,570
Complete Question:
The management of Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows: After Hours Year Sun Fun $320,000 $290,000 320,000 320,000 290,000 320,000 290,000 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.
Required: Compute the net present value for each project. Use a rate of 10%.