Bersano Mfg. accepts proposals for capital investments from its division managers once a year. This year two proposals were recieved. The company uses a 7% discount rate for analyzing projects. The company is only going to finance one project this year. The two proposed projects are:

Project A: The manager has requested to replace an old piece of machinery with a new and more efficient piece of equipment. The old machinery would be sold the following year after installation of the new equipment. The new equipment has an 8-year life.

- Purchase new machine: $450,000

- Sell old equipment in 1 year: $50,000

- Reduction in annual maintenance costs: $5,000

- Major maintenance overhaul in year 5: $50,000

- Increase in annual cash inflow due to increased production: $75,000

Project B: Install solar panels on current facility to reduce electric costs. Panels have an 8-year life.

- Cost of solar system: $200,000

- Tax credits received in year 1: $90,000

- Annual reduction in electric bill: $25,000

- Annual maintenance costs: $1000

Required:

1. Calculate the net present value for each project. Show all computations by preparing a net present value schedule.

2. Which project(s) meet the screening requirements of the company?

3. Which project should the company accept based on net present value alone?

4. Calculate the profitability index for each project. Which project should the company accept based on the profitability index?