The management of Horizon Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:

Year

Radio Station

TV Station

1

$160,000

$450,000

2

160,000

450,000

3

160,000

450,000

4

160,000

450,000

The radio station requires an investment of $456,800, while the TV station requires an investment of $1,366,650. No residual value is expected from either project.

Instructions

1. Compute the following for each project:

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

b. A present value index. Round to two decimal places.

2. 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.

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