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:
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:
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?

Question

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:  
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:  
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?

Quizplus · Accepted Answer

The Answer of 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:  
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:  
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?

Vista Company Is Considering Two New Projects, Each Requiring an Equipment