Grayson Company is considering two new projects each requiring an equipment investment of $72000. Each project will last for three years and produce the following annual net income. Year TIP TOP 1 $ 8 , 000 $ 9 , 000 2 9 , 000 9 , 000 3 14 , 000 9 , 000 \begin{array} { c r r } ext { Year } & { ext { TIP } } & { ext { TOP } } \1 & \$ 8,000 & \$ 9,000 \2 & 9,000 & 9,000 \3 & 14,000 & 9,000\end{array} Year 1 2 3 TIP $8 , 000 9 , 000 14 , 000 TOP $9 , 000 9 , 000 9 , 000 The equipment will have no salvage value at the end of its three-year life. Grayson Company uses straight-line depreciation. Grayson requires a minimum rate of return of 12%. Present value data are as follows: Instructions(a) Compute the net present value of each project.(b) Which project should be selected? Why?

Question

Grayson Company is considering two new projects each requiring an equipment investment of $72000. Each project will last for three years and produce the following annual net income.  Year   TIP   TOP  1 $ 8 , 000 $ 9 , 000 2 9 , 000 9 , 000 3 14 , 000 9 , 000 \begin{array} { c r r } 	ext { Year }  &  { 	ext { TIP } }  &  { 	ext { TOP } } \1  &  \$ 8,000  &  \$ 9,000 \2  &  9,000  &  9,000 \3  &  14,000  &  9,000\end{array}  Year  1 2 3 ​  TIP  $8 , 000 9 , 000 14 , 000 ​  TOP  $9 , 000 9 , 000 9 , 000 ​   The equipment will have no salvage value at the end of its three-year life. Grayson Company uses straight-line depreciation. Grayson requires a minimum rate of return of 12%. Present value data are as follows:   Instructions(a) Compute the net present value of each project.(b) Which project should be selected? Why?

Antoinette Gutierrez · Accepted Answer

Final Answer :    *Net income plus annual depreciation of $24000.    Present value of future cash inflows  $ 81 , 933  Capital investment  72 , 000 ‾  Positive net present value  $ . 933 ‾ \begin{array}{lr}	ext { Present value of future cash inflows }  &  \$ 81,933 \	ext { Capital investment }  &  \underline{72,000} \	ext { Positive net present value }  &  \underline{\$ .933} \\end{array}  Present value of future cash inflows   Capital investment   Positive net present value  ​ $81 , 933 72 , 000 ​ $.933 ​ ​ \quad      \quad      \quad      \quad      \quad      \quad      \quad      \quad      \quad      \quad      \quad      \quad   Project TOP  	ext { Project TOP }  Project TOP   Present value of future cash inflows  ( $ 33 , 000 × 2.402 ) $ 79 , 266  Capital investment  72 , 000  Positive net present value  $ 7 , 266 \begin{array}{ll} 	ext { Present value of future cash inflows  (\$ 33,000 	imes 2.402) } & \$79,266 \	ext { Capital investment }  & 72,000\	ext { Positive net present value } & \$7,266\end{array}  Present value of future cash inflows  ( $33 , 000 × 2.402 )  Capital investment   Positive net present value  ​ $79 , 266 72 , 000 $7 , 266 ​   (b) Both projects are acceptable because both show a positive net present value. Project TIP is the preferred project because its positive net present value is greater than project TOP's net present value.

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