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Calculate the profitability index of the two opportunities

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Net present value, profitability index (LO 3) 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

$70,000

$80,000

Annual cash flow

$28,000

$30,000

Equipment overhaul in year 3

$ 5,000

-

Equipment overhaul in year 5

-

$ 6,000


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?

 

Reference no: EM13496973

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