Perit Industries has $120,000 to invest. The company is trying to decide between

Question

Perit Industries has $120,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project 120,000 0 $%120,000 22,000 70,000 $ 8,800 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 14%. Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using tables. Required: 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?

Explanation / Answer

1 Year Cash flow PVF @ 14% Dicounted cash flow 0            -120,000                       1.000            -120,000 1-6                22,000                       3.889                85,558 6                  8,800                       0.456                  4,013 NPV              -30,429 2 Year Cash flow PVF @ 14% Dicounted cash flow 0            -120,000                       1.000            -120,000 1-6                70,000                       3.889             272,230 NPV             152,230 3 Project B will be accepted

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