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:

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.

Calculate net present value for each project

Perit Industries has $120,000 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.

  

Calculate net present value for each project

Project A Project B   Cost of equipment required $120,000     $0       Working capital investment required $0     $120,000       Annual cash inflows $21,000     $30,000       Salvage value of equipment in six years $8,200     $0       Life of the project 6 years     6 years    

Explanation / Answer

a) Calculate net present value for each project

Project A :

Net present value = Present value of cash inflow-present value of cash outflow

= (21000*3.784+8200*0.432)-120000

Net present value = (36994)

Project B :

Net present value = Present value of cash inflow-present value of cash outflow

= (30000*3.784+120000*0.432)-120000

Net present value = 45360

b) Project B should be accepted

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