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Advanced Digital Design is analyzing a capital investment project for using new computing technology to reduce...

Advanced Digital Design is analyzing a capital investment project for using new computing technology to reduce current operating costs. The new computing technology will have a five-year life with no salvage value at the end of five years. Advanced Digital Design’s cost of capital is 12%. Relevant cash flows and present value factors for 5 years @ 12% are as follows: Investment in computer technology = $500,000. Annual net cash savings from new computer technology = $135,000. Salvage value of new computer technology = $0. Present value of $1 = 0.5674 Present value of an annuity of $1 = 3.6048 The present value ratio of the investment in new computing technology is: Multiple Choice 0.94. 0.97. 1.00. 1.03.

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Answer #1

Present value ratio = present value of Cash inflow/Present value of outflow

= (135000*3.6048)/500000

Present value ratio = 0.97

So answer is b) 0.97

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