(Ignore income taxes in this problem.) Rushforth Manufacturing has $120,000 to i

Question

(Ignore income taxes in this problem.) Rushforth Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects:

Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Rushforth's required rate of return is 11%.

The net present value of Project B is:

Project A Project B   Cost of equipment needed now $120,000      $55,000        Working capital investment needed now $65,000        Annual cash operating inflows $51,500      $29,500        Salvage value of equipment in 6 years $17,500     

Explanation / Answer

Computation of Net Present value

Years Cash inflows Discount @11% Present value of cash flows

1 29500 0.9009 26577

2 29500 0.8116 23942

3 29500 0.7312 21570

4 29500 0.6587 19432

5 29500 0.5935 17508

6 29500 0.5346 15771

Total PV cash inflows 124800

less: initial investment (120000)

NPV 4800

Initial investment = 55000 + 65000 = 120000.

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