Reference no: EM132617430

Extreme Fitness has $80,000 to invest and trying to decide between two projects:

                                                                                       A                                                     B

Cost of equipment required                         $80,000= Project A               $80,000= Project B

Annual cash inflows                                   $21,000= Project A                 $15,000 =Project B

Salvage value of equipment in seven years      $5,000 = Project A                   $0 = Project B

Life of the equipment                               7 years =Project A                    7 years = Project B

Extreme Fitness uses a 20% discount rate.

Required:

Problem 1: Ignore income taxes. Which investment alternative (if either) would you recommend that the company accept? Show all calculations using the net present value format. Show separate calculations for each project.

Hint : The Present Value Factor of $1 for year 7 is 0.279 using a discount factor of 20% and the Present Value of an Annuity of $1 is 3.605 for years 1 to 7 using a discount rate of 20%.