Vista Company is considering two new projects, each requiring an equipment investment of $97,000. Each project will last for three years and produce the following cash inflows:

Year Cool Hot

1 $ 38,000 $ 42,000

2 43,000 42,000

3 48,000 42,000

$129,000 $126,000

The equipment will have no salvage value at the end of its three-year life. Vista Company uses straight-line depreciation and requires a minimum rate of return of 12%.

Present value data are as follows:

Present Value of 1 Present Value of an Annuity of 1

Period 12% Period 12%

1 .893 1 .893

2 .797 2 1.690

3 .712 3 2.402

Instructions

(a) Compute the net present value of each project.

(b) Compute the profitability index of each project.

(c) Which project should be selected? Why?

Additional requirement:

Calculate the Cash Payback period of each project