ABC Inc. is considering investing in a new equipment. It has 2 options. Option A would have an initial lower cost but would require an annual routine maintenance costs of $10,000. Option B would require no routine maintenance, but will require a higher administrative cost (staff time). Since the Option B is of initial higher cost, it is expected to have a salvage value at the end of its useful life. The companys cost of capital is 8%.

	Option A	Option B
Initial cost	$160,000	$227,000
Annual cash inflows/ cash revenue same under both options	$80,000	$80,000
Annual cash outflow: Admin cost	$30,000	$31,000
Annual Cash outflow: Maintenance cost	$10,000	$0
Depreciation method	Straight Line	Straight Line
Salvage value	$0	$8,000
Estimated useful life	5 years	5 years

Other Useful Information:

Present value of $1 of an annuity stream for 7 years @ 8% = 5.20637

Present Value of $1 in 7 years at 8% = .58349

Required:

1. Compute net present value

2. Compute the profitability index

3. Compute the return on investment( ROI = NPV/Capital Investment)

4. Compute the annual rate of return

5. Which option should be accepted based on your analysis above?