Long term capital investment decisions:
Al is about to invest $1,000.
Consider 8%, 10%, and 12% in the calculations.
Expected cost savings for equipment:
Project 1-, year 1 $600, year 2 $600, year 3 $600, year 4 $600
Project 2-, year 1 $300, year 2 $600, year 3 $800, year 4 $700
A. What is present value of each project at each of Al’ s potential costs of capital and which project is acceptable at each.
B. What is the profitability index for each project, using a cost of capital of 10%. Which project would you recommend?
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