A Company Has a Decision to Make Between Two Investment

question 123

Essay

A company has a decision to make between two investment alternatives.The company requires a 10% return on investment.Predicted data is provided below:
$\begin{array}{lrr}& \underline { \text { Investment Y } }& \underline { \text { Investment } Z }\\\text { Projected after-tax net income } & \$ 40,000 & \$ 43,000 \\\text { Investment costs } & \$ 600,000 & \$ 672,000 \\\text { Estimated life } & 6 \text { years } & 6 \text { years }\end{array}$ The present value of an annuity for six years at 10% is 4.3553.This company uses straight-line depreciation.
Required:
a.Calculate the net present value for each investment.
b.Calculate the profitability index for each investment.
c.Which investment should this company select? Explain.

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Definitions:

Long-run Results

Long-run results refer to the outcomes or effects that manifest over an extended period, considering all variables including those that are fixed in the short term can adjust over time.

Adverse Supply Shock

An unexpected event that suddenly decreases supply, leading to higher prices and lower quantities available.

Short-run Phillips Curve

A graphical representation showing the inverse relationship between the rate of inflation and the rate of unemployment in an economy over a short period.

Favorable Supply Shock

An unexpected event that increases the availability of a good or service, thus lowering its price and benefiting consumers.