Problem 4-1

The Riverside Company is evaluating two mutually exclusive projects: Black and White, at the end of 2013. The firms weighted average cost of capital is 8%. Data for each project are as follows:

Black White

Cost of investmentend 2013	25,000		Cost of investmentend 2013	$43,000
Cash inflow2014	8,000		Cash inflow2014	20,000
Cash inflow2015	8,000		Cash inflow2015	30,000
Cash inflow2017	8,000		Cash inflow2016	10,000
Cash inflow2018	8,000		Cash inflow2017	0
Cash inflow2019	8,000		Cash inflow2018	0

Time value of money tables for an 8% discount rate are:

Present Value of 1 Present Value of an Annuity

n	Table Factor		n	Table Factor
1	.92593		1	.92593
2	.85734		2	1.78326
3	.79383		3	2.57710
4	.73503		4	3.31213
5	.68058		5	3.99271

Required:

Compute the net present value for each project using the time value of money tables presented in the exercise.

Determine which project the Riverside Company should invest in based on NPV.

Compute the profitability index for each project.

Determine which project the Riverside Company should invest in based on the profitability index.

Should the firm invest in the Black or White project? What is the basis for your choice?