A Company Has a Decision to Make Between Two Investment

question 31

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:
$$\begin{array} { l rr } &\underline{\text { Investment Y}} & \underline{\text { Investment Z}} \\\text {Projected after-tax net income}&\$ 40,000&\$ 43,000\\\text {Investment costs}&\$ 600,000&\$ 672,000\\\text {Estimated life}&6 \text { years }&6 \text { years }\end{array}$$
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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