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Midtown Shopping Center is trying to decide between the following two investments: Equipment #1 Equipment #2 Initial outlay $5,000 Initial outlay $8,000 Annual cash inflow

Midtown Shopping Center is trying to decide between the following two investments:

Equipment #1 Equipment #2

Initial outlay $5,000 Initial outlay $8,000

Annual cash inflow $1,800 Annual cash inflow $2,900

Estimated useful life 4 years Estimated useful life 4 years

Residual value $ 500 Residual value $ 200

Assume the cost of capital is 12%.

Required:

Calculate the NPV and profitability index for each equipment. Based on your calculations, which equipment should they purchase?

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