Wriston Company has $280,000 to invest. The company is trying to decide between

Question

Wriston Company has $280,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:

The working capital needed for project B will be released for investment elsewhere at the end of seven years. Wriston Company uses a 9% discount rate. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Calculate net present value for each project. (Negative amounts should be indicated by a minus sign.Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)

A           B         Cost of equipment required $ 280,000         $ 0        Working capital investment required $ 0         $ 280,000       Annual cash inflows $ 49,000         $ 34,000       Salvage value of equipment in seven years $ 26,000         $ 0       Life of the project 7 years         7 years    

Explanation / Answer

Hi,

Please find the answer as follows:

NPV (Project A) = -280000 + 49000*PVIFA(9%, 7) + 26000*PVIF(9%, 7) = -280000 + 49000*5.033 + 26000*.547 = -19161

NPV (Project B) = -280000 + 34000*5.033 + 280000*.547 = 44282

Thanks.

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