Perit Industries has $100,000 to invest. The company is trying to decide between
ID: 2471933 • 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 $16,000 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%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: a. Calculate net present value for each project. (Negative amounts should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)
Explanation / Answer
Project A
Year Payment PVIF @ 14% Present Value
0 -100,000 1.000000 -100,000
1 21,000 0.877193 18,421.05
2 21,000 0.769468 16,158.82
3 21,000 0.674972 14,174.40
4 21,000 0.592080 12,433.69
5 21,000 0.519369 10,906.74
6 29,000 0.455587 13,212.01
Net Present Value (Annuity Due) T= 0 to N-1 -14,693.29
Project B
Year Payment PVIF @ 14% Present Value
0 -100,000 1.000000 -100,000
1 16,000 0.877193 14,035.09
2 16,000 0.769468 12,311.48
3 16,000 0.674972 10,799.54
4 16,000 0.592080 9,473.28
5 16,000 0.519369 8,309.90
6 116,000 0.455587 52,848.04
Net Present Value (Annuity Due) T= 0 to N-1 7,777.34
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