7. Rancho, Inc. has the opportunity to invest in one of two mutually exclusive pieces of equipment (Big and Small). The cost of each investment and its projected cash inflows are as follows:

Big Equipment Small Equipment

01/01/14Cash outflow	$40,000		01/01/14Cash outflow	$20,000
12/31/14Cash inflow	$13,000		12/31/14Cash inflow	10,000
12/31/15Cash inflow	$13,000		12/31/15Cash inflow	9,000
12/31/16Cash inflow	$13,000		12/31/16Cash inflow	7,000
12/31/17Cash inflow	$13,000

The firms cost of capital is 6%. Time value of money factors for 6% are as follows:

Present Value of 1	Factor		Present Value of Annuity	Factor
n = 1	.94340		n = 1	.94340
n = 2	.89000		n = 2	1.8339
n = 3	.83962		n = 3	2.67301
n = 4	.79209		n = 4	3.46511

Required:

a. Compute the net present value for both Big and Small.

b. Which project should Rancho invest in if it bases its decision on net present values?

c. Compute the profitability index for both Big and Small.

d. Which project should Rancho invest in if it bases its decision on the profitability indexes?