Compute the net present value and profitability index

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Reference no: EM13900862

Mar Vista Molding Company is considering investing in new therrnokillian equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 3 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows:

	Option A	Option B
Initial cost	$53,000	$58,000
Annual cash inflows	$30,000	$30,000
Annual cash outflows	$15,000	$18,000
Cost to rebuild (end of year 3)	$12,000	$ -0-
Salvage value	S -0-	510,000
Estimated useful life	6 years	6 years

The company"s cost of capital is 8%.

Instructions

(a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option.

(b) Which option should be accepted?

Reference no: EM13900862

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