Capital investment analysis Fernald Country Delivery provides rides and delivery ser- vices for a four county geographic area. The company is evaluating the purchase of five new mid-size vans for use in the business. The cost of the vans is $34,500 each. There is a five percent sales tax in the state and annual license and excise taxes would be $650 a year for each new van. The expected useful life of the vans is five years with a $4,500 per unit expected salvage value.

The new vans would replace three older vans, each with a net book value of $4,500. The old vans have license and excise taxes of $400 per year. Management expects the new vans to increase rural ridership about 20 percent, and the larger size of the new vans should allow the transport of some items previously too large for the company to haul. The expected increase in annual income is $53,000 net of any license fees or excise taxes. The company's cost of capital is 14 percent.

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REQUIRED a. Compute the net present value of the proposed investment and determine if the proposal should be accepted. b. Compute the profitability index for the proposed investment. c. Compute the net present value assuming the company's cost of capital is 16 percent. Should the proposal be accepted? What is the difference between parts a and c?