Problem:
Savanna Company is considering two capital investment proposals. Relevant data on each project are as follows.
|
Project Red
|
Project Blue
|
|
Capital investment
|
$400,000
|
$560,000
|
|
Annual net income
|
$50,000
|
$80,000
|
|
Annual cash flows
|
$100,000
|
$150,000
|
|
Estimated useful life
|
8 years
|
8 years
|
Savanna requires an 8% rate of return on all new investments.
Question 1: Compute the payback period for each project.
Question 2: Compute the net present value for each project.
Question 3: Compute the accounting rate of return for each project.
Question 4: Which project should Savanna select?
Note: Provide support for your rationale.