Solved: Ruddy Automobile Repair Inc currently has three

repair shops in

Ruddy Automobile Repair, Inc., currently has three repair shops in Boston. Wallis Ruddy, the
president and chief executive officer, is facing a pleasant dilemma: the business has continued
to grow rapidly and major shareholders are arguing about different ways to capture more
business opportunities. The company requires a 12 percent rate of return for its investment
projects and uses the straight-line method of depreciation for all fixed assets.
One group of shareholders wants to open another shop in a newly developed suburban
community. This project would require an initial investment of $480,000 to acquire all the
necessary equipment, which has a useful life of five years with a salvage value of $160,000.
Once the shop begins to operate, another $120,000 of working capital would be required; it
would be recovered at the end of the fifth year. The expected net cash inflow from the new shop
follows.

A second group of shareholders prefers to invest $400,000 to acquire new computerized

diagnostic equipment for the existing shops. The equipment is expected to have a useful life of
five years with a salvage value of $80,000. Using this state-of-the-art equipment, mechanics
would be able to pinpoint automobile problems more quickly and accurately. Consequently, it
would allow the existing shops to increase their service capacity and revenue by $125,000 per
year. The company would need to train mechanics to use the equipment, which would cost
$45,000 at the beginning of the first year.

Required
Round your computations to two decimal points.
a. Determine the net present value of the two investment alternatives.
b. Calculate the present value index for each alternative.
c. Indicate which investment alternative you would recommend. Explain yourchoice.

Ruddy Automobile Repair Inc currently has three repair shops in

ANSWER
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