Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2] Perit Indu
ID: 2598423 • Letter: E
Question
Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2] Perit Industries has $130,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B 130,000 Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project 0 $130,000 $ 22,000 33,000 8,300 $ 6 years 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 14%. Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using tables Required 1. Compute the net present value of Project A. (Enter negative values with a minus sign.) 2. Compute the net present value of Project B. (Enter negative values with a minus sign.) 3. Which investment alternative (if either) would you recommend that the company accept? Net present value project A Net present value project B 1. 2. Which investment alternative (if either) would you recommend that the company accept?Explanation / Answer
Answer:- Answer:-1)-The net present value of this project A is -$40657.
2)-The net present value of this project A is $57617.
3) The Perit Industries should invest in Project B due to positive NPV of $57617.
Explanation:-
Net present value of project A = Present value of cash inflows – Total outflows
={($22000*3.889)+($8300*.456) - $130000}
=($85558+$3785) - $130000
= $89343-$130000
= -$40657
Net present value of project B = Present value of cash inflows – Total outflows
={($33000*3.889)+($130000*.456) - $130000}
=($128337+$59280) - $130000
= $187617-$130000
= $57617
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