Net present value method, internal rate of return method, and analysis for a service company

OBJ. 3 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 Sun Fun

1 320,000 290,000

2 320000 290000

3 320000 290000

4 320000 290000

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.

Instructions

Compute the following for each project:

The net present value. Use a rate of 10% and the present value of an annuity of $1 table appearing in this chapter

(Exhibit 5).

AnswerCheck Figure: After Hours $100,800

A present value index. Round to two decimal places.

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 (Exhibit 5).

What advantage does the internal rate of return method have over the net present value method in comparing projects?