Answer:

For this project we have know how the rules of capital expenditure works. The annual rate of return is one of them. The annual rate of return technique is based directly on accounting data. It indicates the profitability of a capital expenditure by dividing expected annual net income by the average investment.

The net present value (NPV) method involves discounting net cash flows to their present value and then comparing that present value with the capital outlay required by the investment. The difference between these two amounts is referred to as net present value (NPV). Company management determines what interest rate to use in discounting the future net cash flows.

Cash Flows × 10% = Present Value

Present value of net annual cash flows = 25,000 × 3.79079 = 94,770

Present value of salvage value = 70,000 × .62092 = 43,464

total= (94,700+43,464)= 138,234

Capital investment =136,000

Net present value= 138,234-136,000= 2,234