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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