Weston 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 Red Blue 1$ 38,000$ 42,000 243,00042,000 3 48,000 42,000 $129,000$126,000

The equipment will have no salvage value at the end of its three-year life. Weston 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 Period12% Period 12% 1.8931.893 2.79721.690 3.71232.402

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