Savanna Company is considering two capital investement proposals. Relevant data on each project are as follows:

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project red project blue

Capital Investment $400,000 $560,000

Annual Net Income $30,000 $60,000

Estimated useful life 8 Years 8 Years

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Depreciation is computed by the straight-line method with no salvage value. Savanna requires an 8% rate of return on all new investments. The present value of 1 for 8 periods at 8% is .540 and the present value of an annuity of 1 for 8 periods is 5.747.

Instructions:

a) Compute the cash payback period for each project

b) Compute the net present value for each project

c) Compute the annual rate of return for each project

d) Which project should Savanna select and why?