American Apparel Inc. has money available for investment and is considering two projects each costing $17,500. Each project has a useful life of 3 years and no salvage value. The investment cash flows follow:

Project A Project B

Year 1 $ 2,000 $7,000

Year 2 6,000 7,000

Year 3 13,000 7,000

Instructions

a.Using the net present value method (hint: use discount factors), compute the net present value for each project if 7% is an acceptable earnings rate. (Use tables from Appendix D.)

b.Which project should be selected? Explain your answer.

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