Bill Zimmerman is has a ten-year life a 10% discount rate. Option 1 $71,700 Opti

Question

Bill Zimmerman is has a ten-year life a 10% discount rate. Option 1 $71,700 Option 2 $82,490 $27,100 $29,460 Equipment purchase and installation Annual cash flow Equipment overhaul in year 3 Equipment overhaul in year5 $4,960 $6,140 Click here to view the factor table. Calculate the net present value of the two opportunities. (Round present value factor calculations to 4 decimal places, e.g. 1.2514 and the final answers to o decimal places, e.g. 59,991.) @atoidkhalia A. éatoGjipiu Net present value $

Explanation / Answer

NPV of Option 1

NPV of Option 2

Profitability Index of two options:

Profitability Index = (NPV + Initial Investment)/Initial Investment

In case of recurring cash flows, PI is better benchmark than NPV.

Based on PI, bill zimmerman should select option 1.

Particulars Cash Inflow / (Outflow) Year PVIF / PVIFA PV of Cash Flows Equipment Purchase & installation (71,700) 0 1.0000 (71,700) Annual Cash Flow 27,100 1 to 10 years 6.1446 1,66,519 Equipment overhaul Charges (4,960) 3 0.7513 (3,726) Net Present Value 91,092

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