Question 1: Evaluating investment projects You are planning to invest $100,000 in new equipment. This investment will generate net cash flows of $60,000 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 ($100) or (100). Should you invest? Why? YES -- the NPV is positive, which indicates that the investment is profitable NO -- the NPV is negative, which indicates that the investment is unprofitable YES -- the NPV is negative, which indicates that the investment will reduce costs b) Compute the payback period. payback period years c) Compute the accounting rate of return (ARR). To compute ARR, first compute: annual depreciation=$ 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 o o payback method only ARR only always use all three methods to reach the best decision