Net present value, profitability index (LO 3) Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a ten-year life. Bill uses a 10% discount rate.
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Option 1
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Option 2
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Equipment purchase and installation
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$70,000
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$80,000
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Annual cash flow
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$28,000
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$30,000
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Equipment overhaul in year 3
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$ 5,000
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-
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Equipment overhaul in year 5
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-
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$ 6,000
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Required
a. Calculate the net present value of the two opportunities.
b. Calculate the profitability index of the two opportunities.
c. Which option should Bill choose? Why?