Question

Perit Industries has $125,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B $125,000 $ $ 23,000 8,900 6 years 0 $125,000 $71,000 $ 6 years Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in aix years Life of the project 0 0 The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 15% Click here to view Exhibit 138-1 and Exhibit 13B-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. 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 sign. Round your final answer to the nearest whole dollar amount.) 3. Which Investment alternative (if either) would you recommend that the company accept? 1 Net present value project A 2. Net present value project B Which investment altemative (if either) would you 3. recommend that the company accept'? Project B

Answer 1

Answer:

Project A:
year	Particulers	Cashflow	PV @15%	Present value
0	Purchase of Equipment	-1,25,000	1.000	-1,25,000
1	Annual Cash Inflows	23,000	0.870	20,010
2	Annual Cash Inflows	23,000	0.756	17,388
3	Annual Cash Inflows	23,000	0.657	15,111
4	Annual Cash Inflows	23,000	0.572	13,156
5	Annual Cash Inflows	23,000	0.497	11,431
6	Annual Cash Inflows	23,000	0.432	9,936
6	Salvage Value	8,900	0.432	3,845
	Total NPV			-34,123
Project B :
year	Particulers	Cashflow	PV @15%	Present value
0	Purchase of Equipment	-1,25,000	1.000	-1,25,000
1	Annual Cash Inflows	71,000	0.870	61,770
2	Annual Cash Inflows	71,000	0.756	53,676
3	Annual Cash Inflows	71,000	0.657	46,647
4	Annual Cash Inflows	71,000	0.572	40,612
5	Annual Cash Inflows	71,000	0.497	35,287
6	Annual Cash Inflows	71,000	0.432	30,672
6	Salvage Value	1,25,000	0.432	54,000
	Total NPV			1,97,664
OPTION B IS BETTER .
NOTE: Discount rate should be same to compare the two alternatives.