Wriston Company has $260,000 to invest. The company is trying to decide between

Question

Wriston Company has $260,000 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 eleven years. Wriston Company uses a 17% 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 $ 260,000         $ 0        Working capital investment required $ 0         $ 260,000       Annual cash inflows $ 99,000         $ 68,000       Salvage value of equipment in eleven years $ 23,000         $ 0       Life of the project 11 years         11 years    

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

NPV (Project A) = -260000 + 99000*PVIFA(17%, 10) + 23000*PVIF(17%,10)

= -260000 + 99000*4.836 + 23000*.178 = 222858

NPV (Project B) = -260000 + 68000*PVIFA(17%, 10) + 280000*PVIF(17%,10)

= -260000 + 68000*4.836 + 260000*.178 = 115128

Part B:

Project A should be selected as it offers a high NPV.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.