The investment committee of Jake's Brewery Inc. is evaluating two projects. The projects have different useful lives, but each requires an investment of $145,000. The estimated net cash flows from each project are as follows:
Project I Project II
1 40,000 55,000
2 40,000 55,000
3 40,000 55,000
4 40,000 55,000
5 40,000
6 40,000
The committee has selected a rate of 15% for purposes of net present value analysis. It is also estimated that the residual value at the end of each project's lif is $0, but at the end of the fourth year, Project I's residual value would be $60,000.
1) For each project, compute the net present value. (Ignore the unequal lives of the projects)
2) For each project, compute the net present value, assuming that Project I is adjusted to a 4-year life for purposes of analysis.
3) Prepare a report to the investment committee, providing your advice on the relative merits of the two projects