Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2) Perit Indu
ID: 2585541 • Letter: E
Question
Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2) Perit Industries has $120,000 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 $120,000 21,000$30,000 $0 6 years $120,000 $8,200 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Pent 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 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 O Project BExplanation / Answer
a Project A Year 0 1 2 3 4 5 6 Cost Of Equipment -120000 Annual Cash Inflow 21000 21000 21000 21000 21000 21000 Salvage value 8200 Net Cash Flow -120000 21000 21000 21000 21000 21000 29200 PV of Cash Flow 1 0.869565 0.756144 0.657516 0.571753 0.497177 0.432328 -120000 18260.87 15879.02 13807.84 12006.82 10440.71 12623.97 Net Present Value -36980.78 Project A Year 0 1 2 3 4 5 6 Working Capital -120000 120000 Annual Cash Inflow 30000 30000 30000 30000 30000 30000 Salvage value Net Cash Flow -120000 30000 30000 30000 30000 30000 150000 PV of Cash Flow 1 0.869565 0.756144 0.657516 0.571753 0.497177 0.432328 PV factor 15% -120000 26086.96 22684.31 19725.49 17152.6 14915.3 64849.14 Net Present Value 45,413.79 b Project B is Recommend as NPV is Postive
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