Perit Industries has $140,000 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 | $140,000 | $0 |
Working capital investment required | $0 | $140,000 |
Annual cash inflows | $23,000 | $67,000 |
Salvage value of equipment in six years | $8,500 | $0 |
Life of the project | 6 years | 6 years |
The working capital needed for project B will be released at the
end of six years for investment |
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. |
Required: |
a. |
Calculate net present value for each project. |
b. | Which investment alternative (if either) would you recommend that the company accept? | ||||
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rev: 12_08_2015_CS-35602, 08_18_2016_QC_CS-56848, 11_10_2016_QC_CS-66978, 11_26_2016_QC_CS-70603
References
eBook & Resources
Statement showing Cash flows | Project A | Project B | ||||
Particulars | Time | PVf 17% | Amount | PV | ||
Cash Outflows | - | 1.00 | (140,000.00) | (140,000.00) | (140,000.00) | (140,000.00) |
PV of Cash outflows = PVCO | (140,000.00) | (140,000.00) | ||||
Cash inflows | 1.00 | 0.8547 | 23,000.00 | 19,658.12 | 67,000.00 | 57,264.96 |
Cash inflows | 2.00 | 0.7305 | 23,000.00 | 16,801.81 | 67,000.00 | 48,944.41 |
Cash inflows | 3.00 | 0.6244 | 23,000.00 | 14,360.52 | 67,000.00 | 41,832.83 |
Cash inflows | 4.00 | 0.5337 | 23,000.00 | 12,273.95 | 67,000.00 | 35,754.55 |
Cash inflows | 5.00 | 0.4561 | 23,000.00 | 10,490.56 | 67,000.00 | 30,559.45 |
Cash inflows | 6.00 | 0.3898 | 23,000.00 | 8,966.29 | 67,000.00 | 26,119.19 |
Cash inflows - Salvage value | 6.00 | 0.3898 | 8,500.00 | 3,313.63 | - | |
Cash inflows - Recvery of WC | 6.00 | 0.3898 | - | 140,000.00 | 54,577.40 | |
PV of Cash Inflows =PVCI | 85,864.88 | 295,052.78 | ||||
NPV= PVCI - PVCO | (54,135.12) | 155,052.78 | ||||
Project B should be accepted | ||||||
Perit Industries has $140,000 to invest. The company is trying to decide between two alternative uses...
Perit Industries has $140,000 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 $140,000 $ 0 $ 23,000 $ 8,500 6 years Project B $ 0 $140,000 $ 67,000 $ 0 6 years The working capital needed for project B will be released at the end of...
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