Al a Mode, Inc., is considering one of two investment options.
Option 1 is a $55,000 investment in new blending equipment that is
expected to produce equal annual cash flows of $18,000 for each of
seven years. Option 2 is a $56,000 investment in a new computer
system that is expected to produce equal annual cash flows of
$23,000 for each of five years. The residual value of the blending
equipment at the end of the fifth year is estimated to be $12,000.
The computer system has no expected residual value at the end of
the fifth year.

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Present Value
of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162
Present Value
of an Annuity of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 1.833 1.736 1.690 1.626 1.528
3 2.673 2.487 2.402 2.283 2.106
4 3.465 3.170 3.037 2.855 2.589
5 4.212 3.791 3.605 3.352 2.991
6 4.917 4.355 4.111 3.784 3.326
7 5.582 4.868 4.564 4.160 3.605
8 6.210 5.335 4.968 4.487 3.837
9 6.802 5.759 5.328 4.772 4.031
10 7.360 6.145 5.650 5.019 4.192

Assume there is sufficient capital to fund only one of the
projects. Determine which project should be selected, comparing the
(a) net present values and (b) present value indices of the two
projects, assuming a minimum rate of return of 15%. Use the present
value tables appearing above.

a. Determine the net present values of the two
projects.

Blending
Equipment
Computer
System
Total present value of cash
flows
$ $
Less amount to be invested $ $
Net present value $ $

b. Determine the present value indices of the
two projects. If required, round the present value index to two
decimal places.

Present Value
Index
Blending Equipment
Computer System

Which project should be selected? (If both present value indices
are the same, either project will grade as correct.)
SelectBlending EquipmentComputer System

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