Question

Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are Project A Project B Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project $100,000 $ 0 $100,000 $ 16,000 0 $21,000 $ 8,000 $ б уеars 6 уеars 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 7B-1 and Exhibit 7B-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 В Which investment alternative (if either) would 3. you recommend that the company accept?

Answer 1

Solution 1 :- Calculation of Net Present Value of Project A

Present value of Annual cash inflows = Annual Cash Inflows * PVAF (14%, 6 Years)

= $ 21000 * PVAF (14%, 6 Years)

= $ 21000 * 3.8888

= $ 81665

Present Value of Salvage value of Equipment = Salvage Value * PVF ( 14% , 6 Year)

= $ 8000 * 0.45559

= $ 3645

Net Present Value of Project A = Present value of Annual cash inflows + Present Value of Salvage value of Equipment - Cost of Equipment

= $ 81665 + $ 3645 - $ 100000 = - $14690

2 :- Calculation of Net Present Value of Project B

Present value of Annual cash inflows = Annual Cash Inflows * PVAF (14%, 6 Years)

= $ 16000 * PVAF (14%, 6 Years)

= $ 16000 * 3.8888

= $ 62221

Net Present Value of Project B = Present value of Annual cash inflows - Working Capital Investment Required

= $ 62221- $ 100000 = - $37779

3. The Company should accept the Investment alternative A (Project A) because Net present value of Annual cash inflows of project A is higher than Net present value of Annual cash inflows of project B.