Problem: Crittenden Company is considering two mutually exclusive investments in capital equipment. The company has a 10% cost of capital. Cash flow information for the two alternatives is below.
Investment 1 Investment 2
Initial investment in equipment $210,000 $135,000
Increase in annual cash flows $ 60,000 $ 40,000
Life of equipment 5 years 5 years
Salvage value of equipment 0 0
1) Determine the present value of the initial investment for each alternative.
2) Determine the present value of the annual cash in flows for each alternative.
3) Compute the net present value for each investment.
4) Compute the profitability index for each investment.
5) Which investment would you recommend? Why?