Question 28 Lambert Manufacturing has $120,000 to invest in either Project A or

Question

Question 28

Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects (Ignore income taxes.):

Project A   Project B
Cost of equipment needed now   $   120,000      $   70,000     
Working capital investment needed now      -      $   50,000     
Annual net operating cash inflows   $   50,000      $   45,000     
Salvage value of equipment in 6 years   $   15,000         -     

Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.

The net present value of Project B is closest to:

      
$77,805
      
$127,805
      
$55,005
      
$105,005

Explanation / Answer

Present value of inflows=45000*Present value of annuity factor(rate%,time period)+50000*Present value of discounting factor(rate%,time period)

=45000*3.889+50000*0.456

=$197805

Present value of outflows=(70000+50000)=$120000

NPV=Present value of inflows-Present value of outflows

=$197805-$120,000

which is equal to

=$77805(A)(Approx).

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