Al a Mode, Inc., is considering one of two investment options. Option 1 is a $47

Question

Al a Mode, Inc., is considering one of two investment options. Option 1 is a $47,000 investment in new blending equipment that is expected to produce equal annual cash flows of $17.000 for each of seven years. Option 2 is a $54,000 investment in a new computer system that is expected to produce equal annual cash flows of S22.000 for each of five years. The residual value of the blending equipment attend of the fifth year is estimated tobe$11,00. The computer system has no expected residual value at the end of the fifth year. Assume there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects, assuming a minimum rate of return of 15% Use the present value tables appearing above Determine the net present values of the two projects. Determine the present value indices of the two projects. If required, round the present value index to two decimal places. Which project should be selected? (If both present value indices are the same, either project will grade as correct.

Explanation / Answer

office expansion server upgrade PMT 17000 22000 no of period 7 5 rate 15% 15% FV 11000 0 PV $74,862.44 $73,747.41 initial cost -47000 -54000 NPV $27,862.44 $19,747.41 PVI 0.59 0.37 (npv/initial cost)

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