Whitney Company is contemplating three different equipment investments. The relevant data follows:
Proposal D Proposal O Proposal G
Cost $200,000 $300,000 $830,000
Annual cash savings (end of year) $40,000 $70,000 $150,000
Terminal salvage value $10,000 $5,000 $20,000
Estimated useful life in years 10 10 10
Minimum desired rate of return 12% 12% 12%
Method of depreciation Straight-line Straight-line Straight-line
The present value factor of an ordinary annuity of one for 10 periods at 12% is 5.6502.
The present value factor of one for 10 periods at 12% is 0.322.
Required:
A) Compute the net present value of each investment. Ignore income taxes.
B) If only one investment can be acquired, which investment should be chosen?