Vista Company is consideringt two new projects, each requiring an equipment investment of $97,000. Each project will last for three years and produce the following cash inflows: Year Cool Hot
1 $38,000 $42,000
2 43,000 42,000
3 48,000 42,000
129,000 $126,000

The equipment will have no salvage value at the end of its three-year life. Vista Company uses straight-line depreciation and requires a minimum rate of return of 12%.

Present Value of 1 Present Value of an Annuity of 1

Period 12% Period 12%
1 0.893 1 0.893
2 0.797 2 1.690
3 0.712 3 2.402

Required:
a. Compute the net present value of each project.
b. Compute the profitability index of each project.
c. Which project should be selected? Why?