You are evaluating projects 1 and 2.  The projects have the following yearly operating profit.  Depreciation expense is $2,000 per year for each project.  Assume a 10% required rate of return.

Project 1                      Project 2

Year 1                                      $ 3,370                        $ 8,000

Year 2                                      $ 3,500                        $ 8,000

Year 3                                      $ 4,100                        $ 8,000

Year 4                                      $ 4,270                        $ 8,000

Year 5                                      $ 4,620                        $ 8,000

Investment                              $ 18,000                      $ 33,200

Required:

Using Net Present Value analysis, please answer the following questions:

1. Assuming you had $100,000 to invest, which investment would you make, if any, and why?
2. Assuming you had $35,000 to invest, which investment would you make, if any, and why?

PV factors are as follows:

            Years               PV of $1           PV of Annuity of $1    

                  1                           0.909                                    

                  2                           0.826

                  3                           0.751

                  4                           0.683

                  5                           0.621                                     3.791                    

You are evaluating projects 1 and 2.  The projects have the following yearly operating profit.  Depreciation expense is $2,000 per year for each project.  Assume a 10% required rate of return.

Project 1                      Project 2

Year 1                                      $ 3,370                        $ 8,000

Year 2                                      $ 3,500                        $ 8,000

Year 3                                      $ 4,100                        $ 8,000

Year 4                                      $ 4,270                        $ 8,000

Year 5                                      $ 4,620                        $ 8,000

Investment                              $ 18,000                      $ 33,200

Required:

1. Using Average Rate of Return, which project, if any, would you evaluate further and why?
2. Using Net Present Value analysis, please answer the following questions:
3. Assuming you had $100,000 to invest, which investment would you make, if any, and why?
4. Assuming you had $35,000 to invest, which investment would you make, if any, and why?

PV factors are as follows:

            Years               PV of $1           PV of Annuity of $1    

                  1                           0.909                                    

                  2                           0.826

                  3                           0.751

                  4                           0.683

                  5                           0.621                                     3.791