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i: CengageNOW | Online teachi × 9 Search Textbook Solutions i C × sjc.cengagenow.com/ilrn/takeAssignment/takeAssignmentMain.do?takeAssignmentSessionLocatorassignment-take Net Present Value-Unequal Lives Al a Mode, Inc., is considering one of two investment options. Option 1 is a $37,000 investment in new blending equipment that is expected to produce equal annual cash flows of $12,000 for each of seven years. Option 2 is a $42,000 investment in a new computer system that is expected to produce equal annual cash flows of $15,000 for each of five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $8,000. The computer system has no expected residual value at the end of the fifth year. Present Value of $1 at Compound Interest Year 6% 1096 12% 15% 0.943 0.909 0.893 0.870 0.797 0.756 0.840 0.751 0.712 0.658 0.792 0.683 0.636 0.572 0.497 0.705 0.564 0.507 0.432 0.665 0.513 0.452 0.376 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.627 0.467 0.404 0.3270.233 0.194 0.162 0.890 0.826 0.7470.621 0.567 0.592 0.424 0.361 0.284 10 Present Value of an Annuity of Year 0.558 0.386 0.322 0.247 1 at Compound Interest 10%% 1 596 1296 0.943 0.909 0.893 0.870 0.833 1.690 6% 20% 1.833 1.736 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 .037 2.855 2.589 4.212 3.791 3.605 4.917 4.355 4.111 5.582 4.868 .5644.160 6.210 2.991 3.326 3.605 3.837 3.352 3.784 5.335 4.968 4.487 6.802 5.759 5.328 4.772 4.031

Explanation / Answer

a. Blending Equipment Equal annual cash flows for Years 1–5 $12,000 × Present value of a $1 annuity at 12% for five periods 3.605 Present value of operating cash flows $43,260 Residual value at end of fifth year $8,000 × Present value of $1 at 12% for five periods 0.567 Present value of of residual value 4,536 Total present value of cash flows $47,796 Less amount to be invested 37,000 Net present value $10,796 Computer System Equal annual cash flows for Years 1–5 $15,000 × Present value of a $1 annuity at 12% for five periods   3.605 Present value of operating cash flows $54,075 Less amount to be invested 42,000 Net present value $12,075 b. Present value index of blending equipment: 47796 ÷ 37000 =                          1.29 Present value index of computer system: 54075 ÷ 42000 =                          1.29 Both the net present value calculations in part (a) and the present value index calculations in part (b) suggest that the computer system should be selected between the two options if there is sufficient capital for only one project investment.

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