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Problem - Need help computing the net present value of each project. Show calculations.

The Candy Company is planning their capital expenditure budget and has to decide which of the following two projects to invest in. Each project will last for three years and produce the following annual net income.

Year

Thunder

Lightning

1

$6,000

$9,000

2

9,000

9,000

3

14,000

9,000

 

$29,000

$27,000

The equipment will have no salvage value at the end of its three-year life. Candy Company uses straight-line depreciation. Candy requires a minimum rate of return of 8%.

Instructions -

(a) Assuming that each project requires an initial investment of $70,000, compute the net present value of each project. [Use tables from Appendix G]

(b) Which project should Candy select? Why?

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