Perit Industries has $175,000 to invest. The company is trying to decide between
ID: 2533024 • Letter: P
Question
Perit Industries has $175,000 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%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) 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?
Project A Project B Cost of equipment required $ 175,000 $ 0 Working capital investment required $ 0 $ 175,000 Annual cash inflows $ 27,000 $ 44,000 Salvage value of equipment in six years $ 8,800 $ 0 Life of the project 6 years 6 yearsExplanation / Answer
Ans: Net present value= Present value of cash inflows- Present value of cash outflows
Project A
year
Particulars
Present value factor @15%
Net Cash flows($)
Present value($) of Net cash flows
0
cost of equipment
1
-175000
-175000
1-6'
Annual cash inflows
3.784
27000
102168
6
salvage value
0.432
8800
3802
Net Present Value
-69030
Project B
year
Particulars
Present value factor @15%
Net Cash flows($)
Present value($) of Net cash flows
0
working capital investment
1
-175000
-175000
1-6
Annual cash inflows
3.784
44000
166496
6
release of working capital
0.432
175000
75600
Net present value
67096
Project B to be selected as NPV is positive.
Project A
year
Particulars
Present value factor @15%
Net Cash flows($)
Present value($) of Net cash flows
0
cost of equipment
1
-175000
-175000
1-6'
Annual cash inflows
3.784
27000
102168
6
salvage value
0.432
8800
3802
Net Present Value
-69030
Project B
year
Particulars
Present value factor @15%
Net Cash flows($)
Present value($) of Net cash flows
0
working capital investment
1
-175000
-175000
1-6
Annual cash inflows
3.784
44000
166496
6
release of working capital
0.432
175000
75600
Net present value
67096
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.