Davis, Managerial Accounting, 3e Help I System Announcements CALCULATOR PRINTER

Question

Davis, Managerial Accounting, 3e Help I System Announcements CALCULATOR PRINTER VERSION BACK NEXT Problem 9-23 Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a ten-year life. Bill uses a 10% discount rate. Option 1 $71,000 Option 2 $81,560 $28,000 $30,410 Equipment purchase and installation Annual cash flow Equipment overhaul in year 3 Equipment overhaul in year 5 $4,510 $5,750 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.) Option 1 Option 2 Net present value $ LINK TO TEXT LINK TO VIDEO VIDEO: SIMILAR EXERCISE

Explanation / Answer

equipment purchase & installation -71000 annual cash flow (28000*6.1446= 172049 equipment overhaul in yr 3 (4510*.7513) -3388 net prsent value 97660 option 2 equipment purchase & installation -81560 annual cash flow (30410*6.1446= 186857 equipment overhaul in yr 5 (5,750*.6209) -3570 net prsent value 101727 ( note for annual cash flow use PV of ordinary annuity table) option 1 option 2 net present value 97660 101727 profitability index = 1 + net present value/initial investment option 1 = 97660/71000 2.38 option 2 = 101,727/81,560 2.25 based on NPV choose option 2 based on profitability index choose option 1

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