Daisy's Creamery Inc. is considering one of two investment options. Option 1 is a $75,000 investment in new blending equipment that is expected to produce equal annual cash flows of $19,000 for each of seven years. Option 2 is a $90,000 investment in a new computer system that is expected to produce equal annual cash flows of $27,000 for each of five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $15,000. The computer system has no expected residual value at the end of the fifth year. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.327 0.233 0.404 0.592 0.424 0.361 0.194 0.284 10 0.558 0.386 0.322 0.247 0.162 Assume that there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects. Assume a minimum rate of return of 10%. Use the present value tables appearing above. a. Determine the net present values of the two projects. Blending Equipment Computer System $ 102,357 v 81,334 x 75,000 V 6,334 x Total present value of cash flows Less amount to be invested 90,000 Net present value 12,357 b. Determine the present value indices of the two projects. If required, round the present value index to two decimal places. Present Value Index Blending Equipment 1.08 Computer System 1.14 Which project should be selected? Computer System v
Daisy's Creamery Inc. is considering one of two investment options. Option 1 is a $75,000 investment in new blending equipment that is expected to produce equal annual cash flows of $19,000 for each of seven years. Option 2 is a $90,000 investment in a new computer system that is expected to produce equal annual cash flows of $27,000 for each of five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $15,000. The computer system has no expected residual value at the end of the fifth year. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.327 0.233 0.404 0.592 0.424 0.361 0.194 0.284 10 0.558 0.386 0.322 0.247 0.162 Assume that there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects. Assume a minimum rate of return of 10%. Use the present value tables appearing above. a. Determine the net present values of the two projects. Blending Equipment Computer System $ 102,357 v 81,334 x 75,000 V 6,334 x Total present value of cash flows Less amount to be invested 90,000 Net present value 12,357 b. Determine the present value indices of the two projects. If required, round the present value index to two decimal places. Present Value Index Blending Equipment 1.08 Computer System 1.14 Which project should be selected? Computer System v
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Daisy's Creamery Inc. is considering one of two investment options. Option 1 is a $75,000 investment in new blending equipment that is expected to produce equal annual cash
flows of $19,000 for each of seven years. Option 2 is a $90,000 investment in a new computer system that is expected to produce equal annual cash flows of $27,000 for each of
five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $15,000. The computer system has no expected residual value at the end of
the fifth year.
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
0.943
0.909
0.893
0.870
0.833
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
0.792
0.683
0.636
0.572
0.482
0.747
0.621
0.567
0.497
0.402
0.705
0.564
0.507
0.432
0.335
0.665
0.513
0.452
0.376
0.279
0.627
0.467
0.327
0.233
0.404
0.592
0.424
0.361
0.194
0.284
10
0.558
0.386
0.322
0.247
0.162
Transcribed Image Text:Assume that there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value
indices of the two projects. Assume a minimum rate of return of 10%. Use the present value tables appearing above.
a. Determine the net present values of the two projects.
Blending Equipment
Computer System
$ 102,357 v
81,334 x
75,000 V
6,334 x
Total present value of cash flows
Less amount to be invested
90,000
Net present value
12,357
b. Determine the present value indices of the two projects. If required, round the present value index to two decimal places.
Present Value Index
Blending Equipment
1.08
Computer System
1.14
Which project should be selected?
Computer System v
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