Sylvia Heain’s Catering Service is considering the purchase of new energy-efficient cooking equipment. The cost of the new equipment is \($78,000\). The equipment has an estimated useful life of eight years and an estimated residual value of \($5,000\). Currently, the company leases similar cooking equipment for \($10,000\) per year. If the new cooking equipment is purchased, the company’s cost of electricity would be reduced by \($8,000\) per year.

Required:

a. Determine the net present value of the cooking equipment 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.