PROBLEMS$-$SERIES B

problem $10-16$B Using present value techniques to evaluate alternative investment

opportunities

perry Automobile Repair Inc. currently has three repair shops in Boston. Jerry Perry, the president and

chief executive officer, is facing a pleasant dilemma: the business has continued to grow rapidly and

mijor shareholders are arguing about different ways to capture more business opportunities. The com$-$

pany requires a $12$ percent rate of return for its investment projects and uses the straight$-$line method of

depreciation for all fixed assets.

One group of shareholders wants to open another shop in a newly developed suburban community.

This project would require an initial investment of $$600,000$ to acquire all the necessary equipment,

which has a useful life of five years with a salvage value of $$200,000.$ Once the shop begins to operate,

another $$150,000$ of working capital would be required; it would be recovered at the end of the fifth

year. The expected net cash inflow from the new shop follows.

A second group of shareholders prefers to invest $$500,000$ to acquire new computerized diagnostic

equipment for the existing shops. The equipment is expected to have a useful life of five years with a

salvage value of $$100,000.$ Using this state$-$of$-$the$-$art equipment, mechanics would be able to pinpoint

automobile problems more quickly and accurately. Consequently, it would allow the existing shops to

increase their service capacity and revenue by $$156,250$ per year. The company would need to train

mechanics to use the equipment, which would cost $$56,250$ at the beginning of the first year.

Required

Round your computations to two decimal points.

a$.$ Determine the net present value of the two investment alternatives.

b$.$ Calculate the present value index for each alternative.

c$.$ Indicate which investment

PLEASE INCLUDE EXCEL FORMULAS