Vista Company is considering two new projects, each requiring an equipment investment of $97,000. Each...
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Accounting
Vista Company is considering two new projects, each requiring an equipment investment of $97,000. Each project will last for three years and produce the following cash inflows:
Year Cool Hot
1 $ 38,000 $ 42,000
2 43,000 42,000
3 48,000 42,000
$129,000 $126,000
The equipment will have no salvage value at the end of its three-year life. Vista Company uses straight-line depreciation and requires a minimum rate of return of 12%.
Present value data are as follows:
Present Value of 1 Present Value of an Annuity of 1
Period 12% Period 12%
1 .893 1 .893
2 .797 2 1.690
3 .712 3 2.402
Instructions
(a) Compute the net present value of each project.
(b) Compute the profitability index of each project.
(c) Which project should be selected? Why?
Additional requirement:
Calculate the Cash Payback period of each project
Answer & Explanation
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