Grayson Company Is Considering Two New Projects Each Requiring an Equipment

Essay

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.
$\begin{array} { c r r } \text { Year } & { \text { TIP } } & { \text { TOP } } \\1 & \$ 8,000 & \$ 9,000 \\2 & 9,000 & 9,000 \\3 & 14,000 & 9,000\end{array}$ 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?