The equipment will have no salvage value at the end of its

Reference no: EM13613790

Magenta Company is considering two new projects, each requiring an equipment investment of $90,000. Each project will last for three years and produce the following cash inflows:

Year	Cool	Hot
1	$38,000	$42,000
2	$42,000	$42,000
3	$42,000	$42,000
	$122,000	$126,000

The equipment will have no salvage value at the end of its three-year life. Magenta 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 .89286 1 .89286
2 .79719 2 1.69005
3 .71178 3 2.40183

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?

Reference no: EM13613790

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