George Gonzalez Construction Company is considering the purchase of a new road grader. The cost of the road grader is \($68,000\). The road grader has an estimated useful life of seven years and an estimated residual value of \($5,000\). Currently, the company rents road graders as needed. If the road grader is purchased, annual rental payments of \($17,000\) would be saved.

Required:

a. Determine the net present value of the grader purchase under each of the following assumptions:

1. The cost of capital is 12 percent.

2. The cost of capital is 14 percent.

3. The cost of capital is 16 percent.

b. Determine the profitability index under each of the following assumptions:

1. The cost of capital is 12 percent.

2. The cost of capital is 14 percent.

3. The cost of capital is 16 percent.