Question

1

Perit Industries has $125,000 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 $125,000 $ 0 $ 23,000 $ 8,900 6 years Project B $ $125,000 $ 71,000 $ 0 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 15%. Click here to view Exhibit 13B-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 Net present value project B Which investment alternative (if either) would you recommend that the company accept?

Answer 1

Net present value Project A	-34123
Net present value Project B	197664
Project B should be accepted
Workings:
Project A:
	Year(s)	Amount of Cash Inflows	PV factor	Present Value of Cash Flows
Cost of the equipment	Now	-125000	1	-125000
Annual cash inflows	1-6	23000	3.784	87032
Salvage value of the equipment	6	8900	0.432	3845
Net present value				-34123
Project B:
Working capital investment	Now	-125000	1	-125000
Annual cash inflows	1-6	71000	3.784	268664
Working capital released	6	125000	0.432	54000
Net present value				197664
PV factor:
(1-(1.15)^-6)/0.15 = 3.784
1/1.15^6 = 0.432