Wriston Company has $360,000 to invest. The company is trying to decide between
ID: 2504840 • Letter: W
Question
Wriston Company has $360,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:
Cost of equipment required $ 360,000 $ 0
Working capital investment required $ 0 $ 360,000
Annual cash inflows $ 97,000 $ 76,000
Salvage value of equipment in eleven years $ 38,000 $ 0
Life of the project 11 years 11 years
The working capital needed for project B will be released for investment elsewhere at the end of eleven years. Wriston Company uses a 15% discount rate. (Ignore income taxes.)
Calculate net present value for each project.
Explanation / Answer
Alternative -1:-
Initial investment = Cost of equipment required
= $360000
Annual cash inflows for 11 years = $97000
Additional cash flow at the at the end of 11th year = $38000
NPV = P.V. of cash inflows - Initial investment
= 97000*PVIFA(15%,11) + 38000/(1.15^11)
Alternative -1:-
Initial investment = Cost of equipment required
= $360000
Annual cash inflows for 11 years = $97000
Additional cash flow at the at the end of 11th year = $38000
NPV = P.V. of cash inflows - Initial investment
= 97000*PVIFA(15%,11) + 38000/(1.15^11)
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