Rushforth Manufacturing has $100,000 to invest in either Project A or project B.
ID: 2627862 • Letter: R
Question
Rushforth Manufacturing has $100,000 to invest in either Project A or project B. The following data are available on these projects; Project A: Cost of equipment needed now $90,000 Working capital investment needed now $10,000 Annual cash operating inflows $30,000 Salvage value of equipment in 6 years $15,000 Project B: Cost of equipment needed now $40,000 Working capital investment needed now $60,000 Annual cash operating inflows $25,000 Salvage value of equipment in 6 years $10,000 Both projects will have a useful life of 6 years, the working capital investment will be released for use elsewhere. Rushforth's required rate of return is 14%. The net present value of project A is: The net present value of project B is:
Explanation / Answer
Net present value of Project A = -$90,000 + $30,000/1.14 + $30,000/1.14^2 + $30,000/1.14^3 + $30,000/1.14^4 + $30,000/1.14^5 + $30,000/1.14^6 +$10,000/1.14^6
= $31,216
Net present value of Project B = -$40,000 -$60,000 + $25,000/1.14 +$25,000/1.14^2 $25,000/1.14^3 + $25,000/1.14^4 + $25,000/1.14^5 + $25,000/1.14^6 + $60,000/1.14^6
=$24,552
The company should choose Project A
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