Perit Industries has $110,000 to invest. The company is trying to decide between

Question

Perit Industries has $110,000 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%.

Required:

a. Calculate net present value for each project.

b. Which investment alternative (if either) would you recommend that the company accept? Project A Project B

Project A Project B   Cost of equipment required $110,000     $0       Working capital investment required $0     $110,000       Annual cash inflows $20,000     $28,000       Salvage value of equipment in six years $8,100     $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 15%.

Explanation / Answer

Computation of Net Present Value of Project A Description Amount ($) Initial Cash Outflow -$110,000.00 Annual Cash inflow for Six Year ( $20000 X 3.784**) $75,680.00 Salvage Value of Machine at 6 year ($8100X0.432***) $3,499.20 Net Present Value -$30,820.80 Hence, Net Present value is -$30820, Computation of Net Present Value of Project B Description Amount ($) Working Capital Investment -$110,000.00 Annual Cash inflow for Six Year ( $28000 X 3.784**) $105,952.00 Working Capital Released at end of year ( $110000X0.432***) $47,520.00 Net Present Value $43,472.00 Hence, Net Present value is -$44472 Net Present Value of project B is Positive hence, Project b can be accepted

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