A Company Produces Two Boat Models,Montauk and Orient $$\begin{array} { c c } \underline{\text { Year }} & \underline{\text { PV factor of } \$ 1} \\1 & 0.8929 \\2 & 0.7972 \\3 & 0.7118\end{array}$$

question 38

Essay

A company produces two boat models,Montauk and Orient.Both products are being considered for major investment projects next year.Relevant data follow:
$$\begin{array}{l}&\underline{\text{Montauk}}&\underline{\text{Orient}}\\\text{New investment}&\$ 400,000&\$ 300,000\\\text{Expected 3-year net cash flows:}\\\text{Year 1}&150,000&130,000\\\text{Year 2}&160,000&130,000\\\text{Year 3}&170,000&130,000\end{array}$$
$$\begin{array} { c c } \underline{\text { Year }} & \underline{\text { PV factor of } \$ 1} \\1 & 0.8929 \\2 & 0.7972 \\3 & 0.7118\end{array}$$
Required:
a.Calculate the net present value and the profitability index of the Montauk (assuming a discount rate of 12%).
b.Calculate the net present value and the profitability index of the Orient.
c.Which boat should the company acquire and why?

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