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1.Vista Company is considering two new projects, Cool and Hot. Project Cool requires an initial investment of $100,000 and Project Hot requires an initial investment
1.Vista Company is considering two new projects, Cool and Hot. Project Cool requires an initial investment of $100,000 and Project Hot requires an initial investment of $103,000. Each project will last for three years and produce the following cash inflows: Year 1 2 3 _Cool $ 39,000 45,000 50,000 $134,000 Hot $ 46,000 46,000 46,000 $138,000 The equipment will have no salvage value at the end of its three-year life. Vista Company uses straight-line depreciation and requires a minimum rate of return of 12%. Present value data are as follows: Present value data are as follows: Present Value of 1 Present Value of an Annuity of 1 Period 12% Period 12% 1 .893 1 .893 2 3 .797 2 1.690 .712 3 2.402 Instructions (a) Compute the net present value of each project. (b) Compute the profitability index of each project. (c) Which project should be selected? Why
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