Exercise 11-5 Net Present Value Analysis of Two Alternatives LO11-2] Perit Indus
ID: 2536929 • Letter: E
Question
Exercise 11-5 Net Present Value Analysis of Two Alternatives LO11-2] Perit Industries has $155,000 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 $155,000 $0 $25,000 $9,600 6 years Project B $0 $155,000 $57,000 $0 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 15% Click here to view Exhibit 11B-1 and Exhibit 11B-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? O Project A ProjectBExplanation / Answer
PROJECT A
PVAF of 15% for 6 years = 3.784
PVAF of 15% in year 6 = 0.432
Present value of cash inflows = (25,000*3.784) + (9,600*0.432)
= 94,600 + 4,147.2
= 98,747.2
Present value of cash outflows = 155,000
Net present value = Present value of cash inflows - Present value of cash outflows
= 98,747.2 - 155,000
= (56,252.8)
PROJECT B
PVAF of 15% for 6 years = 3.784
PVAF of 15% in year 6 = 0.432
Present value of cash inflows = (57,000*3.784) + (155,000*0.432)
= 215,688 + 66,960
= 282,648
Present value of cash outflows = 155,000
Net present value = Present value of cash inflows - Prsent value of cash outflows
= 282,648 - 155,000
= 127,648
a.
b.
Project B (positive Net present value)
Project A Project B Net present value (56,252.8) 127,648Related Questions
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