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: Project A Project B $130,000 $ Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project 0 $130,000 s 21,000 s 65,000 $ 8,100 6 years6 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 138.1 and Exhibit 138-2, to determine the appropriate discount factorís) using tables Required: 1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 2. Compute the net present value of Project B. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 3. Which investment alternative (if either) would you recommend that the company accept? Answer is complete but not entirely correct. Net present value project A 2 Net present value project B 834,083 122,785 Which investment alternative (if either) would you recommend that the company accept? Project B

Explanation / Answer

Discount factor upto 5 decimal Discount factor upto 3 decimal Project A Annual cash inflow $21,000 $21,000 PVIFA (17%,6) 3.58918 3.589 PV of Annual cash inflow I $75,373 $75,369 Salavge Value 8100 8100 PVIF (17%,6) 0.45611 0.456 PV Salavge Value S 3694.491 3693.6 Net Annual cash inflows N= I+S $79,067.3 $79,062.6 Less: Initaila investment V 130000 130000 NPV N-V ($50,933) ($50,937) ans 1 Discount factor upto 5 decimal Discount factor upto 3 decimal Project B Annual cash inflow $65,000 $65,000 PVIFA (17%,6) 3.58918 3.589 PV of Annual cash inflow I $233,297 $233,285 Working capital release 130000 130000 PVIF (17%,6) 0.45611 0.456 PV Working capital release S 59294.3 59280 Net Annual cash inflows N= I+S $292,591 $292,565 Less: Initaila investment V 130000 130000 NPV N-V $162,591 $162,565 ans 2 Ans 3 Project B should be selected as it has more NPV The table not given hence discount factor upto 5 and 3 decimal both are taken. If any doubt please comment

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