Perit Industries has $135,000 to invest. The company is trying to decide between
ID: 2528156 • Letter: P
Question
Perit Industries has $135,000 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 $135,000 e $135,e88 $ 22,000 66,eee $ 8,480 e 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 17%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.Explanation / Answer
Project A
Amount of cash Flow
P.V. Factor @ 17%
Present Value
Annual Cash Flow
1-6
22000
3.589
78958
Salvage value
6
8400
0.390
3276
Initial Investment
135000
-135000
Net Present value
-52766
Project B
Amount of cash Flow
P.V. Factor @ 17%
Present Value
Annual Cash Flow
66000
3.589
236874
Working Capital released
6
135000
0.390
52650
Initial Investment
135000
-135000
Net Present value
154524
Part 3
The company should accept Project B to invest $135000 as it has positive NPV.
Amount of cash Flow
P.V. Factor @ 17%
Present Value
Annual Cash Flow
1-6
22000
3.589
78958
Salvage value
6
8400
0.390
3276
Initial Investment
135000
-135000
Net Present value
-52766
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