Question

Question 1 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 Option 2 Equipment purchase and installation $70,000 $80,500 $27,000 $29,000 Annual cash flow Equipment overhaul in year 3 $4,500 $5,500 Equipment overhaul in year 5 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 0 decimal places, e.g. 59,991.) Option 2 Option 1 Net present value LINK TO TEXT LINK ΤOVIDEO VIDEO: SIMILAR EXERCISE Calculate the profitability index of the two opportunities. (Round answers to 2 decimal places, e.g. 15.25.) Option 2 Option 1 Profitability Index LINK TO ΤΕXT LINK TO VIDEO VIDEO: SIMILAR EXERCISE Which option should Bill choose? Bill should choose Open Show Work Click you would like to Show Work for this question:

Answer 1

Answer-

	Option 1	Option 2
Net Present Value	$99285	$101108

Explanation-

BILL ZIMMERMAN
Net Present Value
Option 1
Particulars	Cash Flows	Present Value Factor @10%	Present value
	(a)	(b)	(c=a*b)
	$		$
Annual net cash flows	27000	6.1446	165904
Equipment purchase & installation	-70000	1	-70000
Equipment overhaul (year 3)	4500	0.7513	3381
Net Present Value			99285
BILL ZIMMERMAN
Net Present Value
Option 2
Particulars	Cash Flows	Present Value Factor @10%	Present value
	(a)	(b)	(c=a*b)
	$		$
Annual net cash flows	29000	6.1446	178193
Equipment purchase & installation	-80500	1	-80500
Equipment overhaul (year 5)	5500	0.6209	3415
Net Present Value			101108

Answer-

	Option 1	Option 2
Profitability Index	1.42	1.26

Particulars	Option
	1	2
Net Present Value $ (A)	99285	101108
Investment required $ (B)	70000	80500
Profitability Index C=A/B	1.42	1.26

Answer- Bill should choose- On the basis of Net present value = Option 2.

On the basis of Profitability Index = Option 1.