Question

Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a ten-year life. Bill uses a 11% discount rate.

		Option 1		Option 2
Equipment purchase and installation		$72,000		$83,270
Annual cash flow		$28,800		$30,860
Equipment overhaul in year 3		$4,620		-
Equipment overhaul in year 5		-		$5,990

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 1	Option 2
Net present value

Calculate the profitability index of the two opportunities. (Round answers to 2 decimal places, e.g. 15.25.)

	Option 1	Option 2
Profitability Index

Which option should Bill choose?

Answer 1

Answer- 1)- Net Present Value- Option 1 =$94231

Option 2 =$94916

Explanation-

Bill Zimmerman
Net Present Value (Option 1)
Particulars	Cash Flows	Present Value Factor @11%	Present value
	(a)	(b)	(c=a*b)
	$	$	$
Annual Cash flow (For 10 years)	28800	5.8892	169609
Equipment purchase & installation	-72000	1	-72000
Equipment overhaul in year 3	-4620	0.7312	-3378
Net Present Value			94231
Bill Zimmerman
Net Present Value (Option 2)
Particulars	Cash Flows	Present Value Factor @11%	Present value
	(a)	(b)	(c=a*b)
	$	$	$
Annual Cash flow (For 10 years)	30860	5.8892	181741
Equipment purchase & installation	-83270	1	-83270
Equipment overhaul in year 5	-5990	0.5935	-3555
Net Present Value			94916

2)- Profitablity Index- Option 1 = 1.31

Option 2= 1.14

Explanation-

Calulation of Profitablity Index
Particulars	Option
	1	2
Net Present Value $ (A)	94231	94916
Investment required $ (B)	72000	83270
Profitablity Index C=A/B	1.31	1.14

Bill should choose option 1.