Problem:
Crittenden Company is considering two mutually exclusive investments in capital equipment that have a 10% cost of capital. Cash flow information for the two alternatives is below.
Investment 1 $Investment 2
Initial investment in equipment $110,000 170,000
Increase in annual cash flows $ 20,000 $ 30,000
Life of equipment 10 years 10 years
Salvage value of equipment 0 0
1. How do you determine the present value of the initial investment for each alternative.
2. How do you determine the present value of the annual cash flows for each alternative.
3. Compute the net present value for each investment.
4. Compute the profitability of each investment.
5. Which investment would you recommend?