Question

Perit Industries has $155,000 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 $155,000 $ 0 $ 0 $155,000 $ 20,000 $ 55,000 $ 9,400 $ 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 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 2. Net present value project B Which investment alternative (if either) would you 3. recommend that the company accept? (34,356) 129,575 Project B

please recheck the answers (something is wrong) thank you

Answer 1

1. Net Present Value of Project-A will be calculated as:

Present value of annual cash flows + Present value of Terminal cash flow(Salvage) - Initial Cash outflow

Present value of Annual cash inflows= Amount * Present value interest factor annuity for 6 years @14%

= 20,000 * 3.887

= $77,774

Present value of salvage value= Amount * Present value interest factor for 6 years @14%

= 9,400 * 0.4556

= $4,283

Total present value of inflows= $77,774 + $4,283 = $82,057

Initial Outflow of cash= $155,000

Net Present Value of Project-A will be= $82,057 - $155,000

= ($72,943)

2. Net Present Value of Project-B will be calculated as:

Present value of annual cash flows + Present value of Terminal cash flow(Release of WC) - Initial Cash outflow

Present value of Annual cash inflows= Amount * Present value interest factor annuity for 6 years @14%

= 55,000 * 3.887

= $213,879

Present value of released Working Capital= 155,000 * PVIF for 6 years @14%

= 155,000 * 0.4556

= $70,618

Total Present Value= $213,879 + $70,618 = $284,497

Net Present Value of Project-B= $284,497 - $155,000

= $129,497

3. From the above calculations, it can be seen that Project-B yields positive NPV. Therefore, Project-B should be accepted.