Perit Industries has $100,000 to invest. The company is trying to decide between
ID: 2347912 • Letter: P
Question
Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:Project A Project B
Cost of equipment required $100,000 $0
Working capital investment required $0 $100,000
Annual cash inflows $21,000 $15,750
Salvage value of equipment in six years $8,000 $0
Life of the project 6 years 6 years
The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%. (Ignore income taxes.)
Solve this problem using your financial calculator or Excel, NOT the tables in the chapter.
Explanation / Answer
Item
Year(s)
Amount of
Cash
Flows
14%
Factor
Present Value of
Cash Flows
Project A:
Cost of the equipment
Now
$(100,000)
1.000
$(100,000)
Annual cash inflows
1-6
$21,000
3.889
81,669
Salvage value of the equipment
6
$8,000
0.456
3,648
Net present value
$(14,683)
Project B:
Working capital investment
Now
$(100,000)
1.000
$(100,000)
Annual cash inflows
1-6
$15,750
3.889
61,252
Working capital released
6
$100,000
0.456
45,600
Net present value
$6,852
Item
Year(s)
Amount of
Cash
Flows
14%
Factor
Present Value of
Cash Flows
Project A:
Cost of the equipment
Now
$(100,000)
1.000
$(100,000)
Annual cash inflows
1-6
$21,000
3.889
81,669
Salvage value of the equipment
6
$8,000
0.456
3,648
Net present value
$(14,683)
Project B:
Working capital investment
Now
$(100,000)
1.000
$(100,000)
Annual cash inflows
1-6
$15,750
3.889
61,252
Working capital released
6
$100,000
0.456
45,600
Net present value
$6,852
Invest in Project B, it has better NPV than Project A.Related Questions
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