PRESENT VALUE CALCULATION Halftime Manufacturing has $80,000 to invest in either

Question

PRESENT VALUE CALCULATION

Halftime Manufacturing has $80,000 to invest in either Project A or Project B. The following data are available on these projects:

Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Halftime's required rate of return is 9%.

REQUIRED: Based on the above information, what is the net present value of Project A? What is the net present value of Project B? Use the templates below to solve these problems.

Halftime Manufacturing

Project A Project B Cost of equipment needed now $80,000 $65,000 Working capital investment (now) $0 $15,000 Annual cash operating inflows $19,000 $25,000 Salvage value of equipment in 6 years $5,000 $0

Explanation / Answer

Project A Year(s) Amount of cash flow 9% Factor Present Value of Cash Flows Initial investment Now 80,000 1 (80,000) Annual cash operating inflows 1-6 19,000 4.486 85,234 Salvage 6 5000 0.596 2,980 Net present value 8,214 Project B Year(s) Amount of cash flow 9% Factor Present value of cash flows Initial Investment Now (65,000) 1 (65,000) Working capital Now (15,000) 1 (15,000) Reduced labor and other costs 1-6 25,000 4.486 112,150 Net present value 32,150

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