Perit Industries has $100,000 to invest. The company is trying to decide between

Question

Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. 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.) 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

Required:
(a)Calculate net present value for each project. (Negative amount should be indicated by a minus sign. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Net present value
Project A
$
Project B
$




--------------------------------------------------------------------------------

Explanation / Answer

NPV=-co+r(t)/(1+i)^t where co is the initial investment and r(t) is the return over years , t is the time in years , i is the interest rate discount rate is 14%=i ****** NPV states that that project should be selected which has a highaer positive value .. 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 project A npv=-$100,000+$21,000/(1+.14)^t + $8,000 / (1+.14)^6 where t varies from 1 to 6 project B npv=-$100,000+$15,750 /(1+.14)^t where t varies from 1 to 6 the one which gives higher positive value is selected

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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