Net present value—unequal lives
Buscho Industries is considering one of two investment options. Option 1 is a $45,000 investment in new blending equipment that is expected to produce equal annual cash flows of $18,000 for each of eight years. Option 2 is a $17,000 investment in a new computer system that is expected to produce equal annual cash flows (savings) of $10,000 for each of four years. The residual value of the blending equipment at the end of the fourth year is estimated to be $5,000. The computer system has no expected residual value at the end of the fourth year.
Assume there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects, assuming a minimum rate of return of 12%. Round the present value index to two decimal places. Use the table of present values in the chapter.
