Vista Company is consideringt two new projects, each requiring an equipment investment of $97,000. Each project will last for three years and produce the following cash inflows: Year Cool Hot
1 $38,000 $42,000
2 43,000 42,000
3 48,000 42,000
129,000 $126,000

The equipment will have no salvage value at the end of its three-year life. Vista Company uses straight-line depreciation and requires a minimum rate of return of 12%.

Present Value of 1 Present Value of an Annuity of 1

Period 12% Period 12%
1 0.893 1 0.893
2 0.797 2 1.690
3 0.712 3 2.402

Required:
a. Compute the net present value of each project.
b. Compute the profitability index of each project.
c. Which project should be selected? Why?

a. Net Present Value of Cool:

= Present value of cash inflows - Initial investment

= ∑(Cash flows * Present value factor) - Initial investment

= (38,000 * 0.893) + (43,000 * 0.797) + (48,000 * 0.712) - 97,000

= 102,381 - 97,000

= $5,381

Net Present value of Hot.

Cashflows are constant so this is an annuity:

= Cashflow * Present value interest factor of annuity - Initial investment

= 42,000 * 2.402 - 97,000

= 100,884 - 97,000

= $3,884

b. Profitability index for Cool:

= Present value of inflows / Initial investment

= 102,381 / 97,000

= 1.06

Profitability index for Hot:

= 100,884 / 97,000

= 1.04

c. Project Cool should be selected because it has a higher Net Present Value.

answer(d) the growth of consumption is likely to remain sluggish even as the economy begins to recover.;

the answer is "b.the increased supply will create a surplus. "

the essential thought behind price controls is straightforward - utilize the power of law to modify the equilibrium of a market. for instance, the legislature may choose that the steel business needs to survive, and in this way pass a law to set a value floor on steel. this implies all steel sold must offer at or over the floor value, which must be set over the equilibrium cost for it to have any impact. the switch could likewise happen - the administration can choose that steel is excessively costly and set a value roof underneath its equilibrium value, with the goal that all steel must be sold at or beneath that ceiling.