Question

Bil Zimmermans evaluating two new business opportunities. Each of the opportunities shown below has a ten year lite uses a 11% discount rate Option 1 $71,100 $28,100 $4,710 Option 2 $82,150 $30,440 Equipment purchase and installation Annual cash flow Equipment overhaul in year 3 Equipment overhaul in year 5 $5,970 Gick 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 decimal places, 59.991.) Option 1 Option 2 Net present values LINK TO TEXT VIDEO SIRILAR EXERCIS .. 15.25.) Calculate the profitability index of the two opportunities. (Round answers to 2 decimal places Option 1 Option 2 Profitability Index LINK TO TEXT Which option should Bill choose? should choose Click if you would like to show Work for this question: Open Show Work

Answer 1

Solution 1:

Computation of NPV
			Option 1		Option 2
Particulars	Period	PV Factor (11%)	Amount	Present Value	Amount	Present Value
Cash outflows:
Equipment purchase and installation	0	1	$71,100	$71,100	$82,150	$82,150
Overhaul - Option 1	3	0.7312	$4,710	$3,444	$0	$0
Overhaul - Option 2	5	0.5935	$0	$0	$5,970	$3,543
Present Value of Cash outflows (A)				$74,544		$85,693
Cash Inflows
Annual cash inflows	1-10	5.88920	$28,100	$165,487	$30,440	$179,267
Present Value of Cash Inflows (B)				$165,487		$179,267
Net Present Value (NPV) (B-A)				$90,943		$93,574

Solution 2:

Computation of Profitability Index
Particulars	Option 1	Option 2
NPV	$90,943	$93,574
Divided by: Initial investment	$71,100	$82,150
Profitability Index	1.28	1.14

Solution 3:

Bill should choose option 1.