Question 1: Evaluating investment projects You are planning to invest $50,000 in new equipment. This investment will generate net cash flows of $30,000 a year for the next 2 years. The salvage value after 2 years is zero. The cost of capital is 25% a year. a) Compute the net present value NPV = $ Enter negative numbers with a minus sign, i.e., -100 not ($100) or (100). Should you invest? Why?

YES -- the NPV is positive, which indicates that the investment is profitable

YES -- the NPV is negative, which indicates that the investment will reduce costs

NO -- the NPV is negative, which indicates that the investment is unprofitable

b) Compute the payback period. payback period = years c) Compute the accounting rate of return (ARR). To compute ARR, first compute: annual depreciation=$ annual income=$ average investment=$ ARR = % If your answer is 10%, enter 10 without the percent sign. d) Which of the three methods in (a)-(c) should you use in real life?

NPV only

payback method only

ARR only

always use all three methods to reach the best decision