Question

Pertt Industries has $140,000 to Invest. The company is trying to decide between two alternative uses of the funds. The alternatives are Project AProject B Cost of equipent required Working capital investment required Annual cash inflows Salvage value of equipment in siK years Life of the project $140, 000 $140,000 $ 26,000 60,000 9,700 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 17% Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the approprlate discount factor(s) using tables. Required: 1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 2 Compute the net present value of Project B. (Enter negative values with a minus slgn. Round your final answer to the nearest whole doller amount.) 3. Which Investment alternative (If elther) would you recommend that the company accept? 1. Net present value project A 2 Nat present value project B Which investment alternative (if either) would you 3. recommend that the company accept?

Answer 1

Solution 1&2:

Computation of NPV - Perit Industries
			Project A		Project B
Particulars	Period	PV Factor (6%)	Amount	Present Value	Amount	Present Value
Cash outflows:
Cost of equipment	0	1	$140,000	$140,000	$0	$0
Investment in working capital	0	1	$0	$0	$140,000	$140,000
Present Value of Cash outflows (A)				$140,000		$140,000
Cash Inflows
Annual cash inflows	1-6	3.58918	$26,000	$93,319	$60,000	$215,351
Salvage value	6	0.38984	$9,700	$3,781	$0	$0
Release of working capital	6	0.38984	$0	$0	$140,000	$54,578
Present Value of Cash Inflows (B)				$97,100		$269,928
Net Present Value (NPV) (B-A)				-$42,900		$129,928

Solution 3:

Company should accept project B as its NPV is highest.

Note: As factor tables are not provided, i have rounded off PV Factor in 5 decimal places. Therefore actual answer may differ due to rounding off differences.