Perit Industries has $165,000 to invest. The company is trying to decide between

Question

Perit Industries has $165,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

Perit Industries has $165,000 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 Project B $0 $0 S165,000 $56,000 $0 years 165,000 $21,000 $9,500 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 14% Click here to view Exhibit 13B-1 and Exhibit 13B-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 B Project A

Explanation / Answer

SOLUTION

(A) Net Present value-

(B) The $165,000 should be invested in Project B rather than in Project A. Project B has a positive net present value whereas Project A has a negative net present value.

Item Years Amount of cash inflows ($) (A) 14% factor (B) Present value of cash flows ($) (A*B) PROJECT - A Cost of the equipment Now (165,000) 1.000 (165,000) Annual cash inflows 1-6 21,000 3.889 81,669 Salvage value of the equipment 6 9,500 0.456 4,332 Net present value (78,999) PROJECT- B Working capital investment Now (165,000) 1.000 (165,000) Annual cash inflows 1-6 56,000 3.889 217,784 Working capital released 6 165,000 0.456 75,240 Net present value 128,024

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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