Net Present Value-Unequal Lives Al a Mode, Inc., is considering one of two inves

Question

Net Present Value-Unequal Lives
Al a Mode, Inc., is considering one of two investment options. Option 1 is a $54,000 investment in new blending equipment that is expected to produce equal annual cash flows of $18,000 for each of seven years. Option 2 is a $61,000 investment in a new computer system that is expected to produce equal annual cash flows of $23,000 for each of five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $12,000. The computer system has no expected residual value at the end of the fifth year.

first attemp:

http://sjc.cengagenow.com/ilrn/takeAssignment/takeAssignmentMain.do?takeAssignmentSessionLocator=assignment-take

Present Value of $i at Compound Interest Year 696 10% 12% 15% 20% 0.9430.9090.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.940 0.7510.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.7470.6210.5670.4970.402 0.7050.5640.507 0.4320,335 0.6650,5130.452 0.376 0.279 0.6270.4670.404 0.3270.233 9 0.592 0.424 0.3610.2840.194 10 0.5580.3860.322 0.247 0.162 3 6 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0:8930.8700.933 2 1.833 1.736 1.690 1.626 1.528 2.6732,4872 4022.283 2.106 4 3.465 3.170 3.0372.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4917 4.355 4.111 3.794 3.326 5.582 4.8684.5644.160 3.605 6.210 5.335 4.9694 4973.837 5.759 5.329 4.772 4 031 10 7.360 6.1455.650 5,019 4.192 6.902 1 Assume shere is sufficient capital to fund only one of she Proeste D velue tables appearing above

Explanation / Answer

Answer a.

Blending Equipment:

Amount to be Invested = $54,000
Annual Net Cash flows = $18,000
Residual Value = $12,000
Life of Project = 5 years
Rate of Return = 15%

Present Value of Annual Net Cash flows = $18,000 * Present Value of an Annuity of $1 (15%, 5) + $12,000 * Present Value of $1 (15%, 5)
Present Value of Annual Net Cash flows = $18,000 * 3.352 + $12,000 * 0.497
Present Value of Annual Net Cash flows = $66,300

Net Present Value = Present Value of Annual Net Cash flows - Amount to be Invested
Net Present Value = $66,300 - $54,000
Net Present Value = $12,300

Answer b.

Blending Equipment:

Profitability Index = Present Value of Annual Net Cash flows / Amount to be Invested
Profitability Index = $66,300 / $54,000
Profitability Index = 1.23

Answer c.

So, Computer System should be selected

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---