Question

Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project Project A Project B $100,000 $ $ 0 $100,000 $ 21,000 $ 16,000 $ 8,000 $ 0 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 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. $ (14,690) $ (37,779) 2. Net present value project A Net present value project B Which investment alternative (if either) would you recommend that the company accept? Project A X

Answer 1

Answer- 1)-Net present value of Project A = ($14690).

Explanation-

Perit Industries
Net Present Value
	Project A
Particulars		Present Value Factor @14%	Present value
	(a)	(b)	(c=a*b)
Net cash inflow per year (For 6 years)	21000	3.889	81670
New Equipment (1st Year)	-100000	1	-100000
Salvage value (6th year)	8000	0.455	3640
Net Present Value			-14690

2)-  Net present value of Project B =$7724.

Explanation-

Perit Industries
Net Present Value
	Project B
Particulars	Cash Flows	Present Value Factor @14%	Present value
	(a)	(b)	(c=a*b)
Net cash flow per year (For 6 years)	16000	3.889	62224
Working capital investment (1st Year)	-100000	1	-100000
Working capital released (6th year)	100000	0.455	45500
Net Present Value			7724

3)-The company should accept Project B.