(Appendix 13A and 13B) Roy Company is trying to decide whether to invest in one of two projects: X or Z. Associated data for each investment project follow:

Project

X Z

Cost of equipment $90,000 $140,000

Useful life 6 years 9 years

Annual net cash inflow $25,000 $ 30,000

Salvage value $8,000 $12,000

The equipment for each project is in Class 22 with a 30% maximum CCA rate. The income tax rate is 30%. Roy's after-tax cost of capital is 12%.

Required:

a) Calculate the net present value of each project, and indicate which appears preferable in terms of net present value.

b) Calculate the profitability index for each project, and indicate which project would be preferable using this investment criterion.