The investment committee of Safe Hands Insurance Co. is evaluating two projects. The projects have different useful lives, but each requires an investment of $225,000. The estimated net cash flows from each project are as follows:

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, Project I's residual value would be $150,000.

Instructions
1. For each project, compute the net present value. Use the present value of an annuity of $1 table appearing in this chapter. (Ignore the unequal lives of the projects.)
2. For each project, compute the net present value, assuming that Project I is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table appearing in this chapter.
3. Prepare a report to the investment committee, providing your advice on the relative merits of the twoprojects.

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Net Cash Flows Year Project I Project ll $70,000 70,000 70,000 70,000 70,000 70,000 $98,000 98,000 98,000 98,000