E7.10 (LO 3), AP The local gas station owner, Ralph, is looking to invest in LED lighting displays around his fuel pumps to distinguish his station from the one just down the street. He has received several bids from cred- ible companies, none of whom have worked with Ralph before. He knows this type of investment is needed Determine NPV and profitability index for three options CHAPTER 7 Capital Budgeting Choices and Decisions to keep his business looking current and trendy, but he is anything but "pumped" about spending this much money on a lighting display. Based on significant research and discussions with friends in the industry, he makes the following esti- mates to go along with each bid. Bidi Bid 2 Bid 3 Cost of lighting, installed $80,000 $100,000 $75,000 Additional annual revenues 15,000 17,000 15,000 Additional annual operating costs 1,800 2,500 3,000 The useful life of all three lighting schemes is 15 years, at which point none of them would have any salvage value. Ralph's station is subject to a 25% tax rate and has a required rate of return of 8% on new projects. Required a. Determine the present value of the future cash flows for each bid, then determine the NPV of each bid overall. b. Calculate the profitability index for each bid and then rank the three bids accordingly. Describe in words what the profitability index means in the context of the bid with the highest profitability index. C. Does your quantitative analysis suggest that an investment in LED lighting is almost certainly going to pay off for Ralph? Is there a clear choice in bids based on the NPV and/or profitability index? In the end, what other qualitative factors might help the owner decide which bid to accept, if any