Wriston Company has $310,000 to invest. The company is trying to decide between

Question

Wriston Company has $310,000 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 four years. Wriston Company uses a 14% 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 $ 310,000         $ 0        Working capital investment required $ 0         $ 310,000       Annual cash inflows $ 68,000         $ 53,000       Salvage value of equipment in four years $ 36,000         $ 0       Life of the project 4 years         4 years     Wriston Company has $310,000 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 four years. Wriston Company uses a 14% discount rate. (Ignore income taxes.) 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.) Which investment alternative (if either) would you recommend that the company accept?

Explanation / Answer

Hi,

Please find the answer as follows:

NPV (Project A) = -310000 + 68000*PVIFA(14%, 4 Years) + 36000*PVIF(14%, 4 Years) = -310000 + 68000*2.914 + 36000*.592 = -90536

NPV (Project B) = -310000 + 53000*PVIFA(14%, 4 Years) + 310000*PVIF(14%, 4 Years) = -310000 + 53000*2.914 + 310000*.592 = 27692

Project B should be accepted.

Thanks,

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