Analyze which piece of equipment is a better capital investment based on the information given below. (Round the answer to the nearest whole number.)
| Equipment 1 | Equipment 2 | |||
| Cost | $4,000 | $4,000 | ||
| The minimum desired rate of return | 10% | 10% | ||
| Expected useful life | 2 years | 3 years | ||
Yearly expected cash flows to be received:
| Equipment 1 | Equipment 2 | |||
| Year 1 | $3,000 | $2,500 | ||
| Year 2 | $2,500 | $1,500 | ||
| Year 3 | $0 | $1,500 | ||
| Year | Present value of $1 at 10% | |
| Year 1 | 0.909 | |
| Year 2 | 0.826 | |
| Year 3 | 0.751 | |
The residual value of Equipment 2 at the end of Year 2 is $1,350.
a). Equipment 2 is a better investment as its net present value is lesser than that of Equipment 1.
b). Equipment 2 is a better investment as its net present value is greater than that of Equipment 1.
c). Equipment 1 is a better investment as its net present value is greater than that of Equipment 2.
d). Equipment 1 is a better investment as its net present value is lesser than that of Equipment 2.
