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Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a ten-year life. Bill uses

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Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a ten-year life. Bill uses a 10% discount rate.

Option 1 Option 2 Equipment purchase and installation Annual cash flow Equipment overhaul in year 3 Equipment overhaul i

Required

a. Calculate the net present value of the two opportunities.

b. Calculate the profitability index of the two opportunities.

c. Which option should Bill choose? Why?


Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
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Option 1 Option 2 Equipment purchase and installation Annual cash flow Equipment overhaul in year 3 Equipment overhaul in year 5 $70,000 $28,000 $ 5,000 $80,000 $30,000 $ 6,000

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a Option 1 Cash Flow Timing Amount 10 PV Factor Present Value Purchase price Year 0 70 …View the full answer


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Managerial Accounting

Managerial Accounting

ISBN: 978-1118338445

2nd edition

Authors: Charles E. Davis, Elizabeth Davis

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Question Posted: February 21, 2014 04:20:18
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