Perit Industries has $210,000 to invest. The company is trying to decide between

Question

Perit Industries has $210,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project Project A $210,000 $0 $30,000 $9,100 6 years Project B $0 $210,000 $52,000 $0 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Pent 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. Required: a. Calculate net present value for each project. Project A Project B Net present value b. Which investment alternative (if either) would you recommend that the company accept? Project B Project A

Explanation / Answer

Statement showing Cash flows Project A Project B Particulars Time PVf 15% Amount PV Cash Outflows                        -                        1.00            (210,000.00)            (210,000.00)            (210,000.00)            (210,000.00) PV of Cash outflows = PVCO            (210,000.00)            (210,000.00) Cash inflows                    1.00                 0.8696                 30,000.00                 26,086.96                 52,000.00                 45,217.39 Cash inflows                    2.00                 0.7561                 30,000.00                 22,684.31                 52,000.00                 39,319.47 Cash inflows                    3.00                 0.6575                 30,000.00                 19,725.49                 52,000.00                 34,190.84 Cash inflows                    4.00                 0.5718                 30,000.00                 17,152.60                 52,000.00                 29,731.17 Cash inflows                    5.00                 0.4972                 30,000.00                 14,915.30                 52,000.00                 25,853.19 Cash inflows                    6.00                 0.4323                 30,000.00                 12,969.83                 52,000.00                 22,481.03 Cash inflows - Salvage value                    6.00                 0.4323                   9,100.00                   3,934.18                                -   Cash inflows - Recvery of WC                    6.00                 0.4323                                -                210,000.00                 90,788.80 PV of Cash Inflows =PVCI              117,468.66              287,581.90 NPV= PVCI - PVCO              (92,531.34)                 77,581.90 Company should accept project B

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