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

question 22

Essay

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?

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Definitions:

Inventory Policy

A set of guidelines a company follows to determine the optimum levels of inventory to hold.

Direct Materials

Raw materials that are directly attributable and integral to the manufacturing of a product.

Ceramic Tile

A durable, hard surface tile made from clay that has been fired at high temperatures, used for covering floors, walls, or other surfaces.

Administrative Expense

Expenses related to the general operation of a business, including executive salaries, legal and professional fees, and office supplies.