Perit Industries has $130,000 to invest. The company is trying to decide between

Question

Perit Industries has $130,000 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 $130,000 $0 $21,000 $8,100 6 years Project B $0 $130,000 $65,000 $0 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 17% 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 A Project B

Explanation / Answer

Year(s) Amount of Cash Inflows PV factor Present Value of Cash Flows Project A: Cost of the equipment Now -130000 1 -130000 Annual cash inflows 1-6 21000 3.589 75369 Salvage value of the equipment 6 8100 0.39 3159 Net present value -51472 Project B: Working capital investment Now -130000 1 -130000 Annual cash inflows 1-6 65000 3.589 233285 Working capital released 6 130000 0.39 50700 Net present value 153985 b Project B should be accepted

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.