Perit Industries has $140,000 to invest. The company is trying to decide between
ID: 2487512 • Letter: P
Question
Perit Industries has $140,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:
The working capital needed for project B will be released at the end of six years for investment
elsewhere. Perit Industries’ discount rate is 15%.
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. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)
Now 1 2 3 4 5 6
Project A:
Purchase of Equipment
Annual cash flows
Salvage Value
Total cash flows
Discount factor (15%)
Present Value
Net Present Value
Project B:
Working capital invested
Annual cah inflows
working capital released
total cash flows
Discount factor (15%)
Present Value
Net present value
Perit Industries has $140,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:
Explanation / Answer
Answer
Answer (a)
Project A
Figures in $
Year
Annual Cash flows
Cost of Equipment
Cash flows
Disc Rate : 15%
Present value
A
B
C
D
A+B
C*D
0
-140000
-140000
1
-140000
1
23000
23000
0.869565
20000
2
23000
23000
0.756144
17391.3
3
23000
23000
0.657516
15122.87
4
23000
23000
0.571753
13150.32
5
23000
23000
0.497177
11435.06
6
23000
8400
31400
0.432328
13575.09
Net Present value
-49325.3
Project B
Figures in $
Year
Annual Cash
flows
Working Capital
Cash
flows
Disc Rate : 15%
Present value
A
B
C
D
A+B
C*D
0
-140000
-140000
1
-140000
1
35000
35000
0.869565
30434.78
2
35000
35000
0.756144
26465.03
3
35000
35000
0.657516
23013.07
4
35000
35000
0.571753
20011.36
5
35000
35000
0.497177
17401.19
6
35000
140000
175000
0.432328
75657.33
Net Present value
52982.76
Answer (b)
Company should accept Project B as its NPV is positive.
Figures in $
Year
Annual Cash flows
Cost of Equipment
Cash flows
Disc Rate : 15%
Present value
A
B
C
D
A+B
C*D
0
-140000
-140000
1
-140000
1
23000
23000
0.869565
20000
2
23000
23000
0.756144
17391.3
3
23000
23000
0.657516
15122.87
4
23000
23000
0.571753
13150.32
5
23000
23000
0.497177
11435.06
6
23000
8400
31400
0.432328
13575.09
Net Present value
-49325.3
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