5 Exercise 13-7 Net Present Value Analysis of Two Alternatives [L013-2 Perit Ind
ID: 2589304 • Letter: 5
Question
5 Exercise 13-7 Net Present Value Analysis of Two Alternatives [L013-2 Perit Industries has $110,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives 166 Coat of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project $110,000 0 $110,000 68,000 $ 20,000 8,600 The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries discount rate is 16%. Click here to view Exhibit 138-1 and Exhibit 13B-2, to determine the appropriate discount factorts) using tables 1 Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest ReferencesRequired: the net present value of Project B. (Enter negative values with a minus sign. Round your final answer to the nearest 3. Which recommend that theExplanation / Answer
Item
Years
Cash flows
16% factor
Present value of cash flows
Project A:
Cost of the equipment
0
-110000
1.00
-110000
Annual cash flows
1 to 6
20000
3.685
73700
salvage value of the equipment
6
8600
0.41
3526
Net present value
-32774
Project B:
working capital investment
0
-110000
1.00
-110000
Annual cash flows
1 to 6
68000
3.685
250580
Working capital released
6
110000
0.41
45100
Net present value
185680
Amount should be invested project B because it gives positive cashflows
Item
Years
Cash flows
16% factor
Present value of cash flows
Project A:
Cost of the equipment
0
-110000
1.00
-110000
Annual cash flows
1 to 6
20000
3.685
73700
salvage value of the equipment
6
8600
0.41
3526
Net present value
-32774
Project B:
working capital investment
0
-110000
1.00
-110000
Annual cash flows
1 to 6
68000
3.685
250580
Working capital released
6
110000
0.41
45100
Net present value
185680
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