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 $100,000 $0
Working capital investment required $0 $100,000
Annual cash inflows $21,000 $16,000
Salvage value of equipment in six years $8,000 $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 elsewhere. Perit Industries' discount rate is 14%. (Ignore incometaxes.)

To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 (0.456) and Exhibit 12B-2 (3.889). Alternatively, if you calculate thediscount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.

Required:
(a)

Calculate net present value for each project. (Negative amount should be indicated by a minus sign. Round your answer to the nearest dollar amount. Omit the "$" signin your response.)

Net present value
Project A $ -14,683 (correct answer)
Project B $ ??

Answer 1

Answer:-a)- Net present value of each project:-

Project A = ($14683)

Project B = $6852

Explanation:-

Perit Inductries
Net Present Value
	Project A
Particulars		Present Value Factor @14%	Present value
	(a)	(b)	(c=a*b)
Net cash flow per year (For 6 years)	21000	3.889	81669
New Equipment (1st Year)	-100000	1	-100000
Salvage value (6th year)	8000	0.456	3648
Net Present Value			-14683
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)	15750	3.889	61252
Working capital investment (1st Year)	-100000	1	-100000
Working capital released (6th year)	100000	0.456	45600
Net Present Value			6852

b)-The company should accept Project B due to positive net positive value.

Answer 2

The return on investment at 14% is computed below:

Project A
Item	Years	Amount of cash flow	14% factor	Present value of cash flow
Cost of Equipment	Now	-$100,000	1.000	-$100,000
Annual Cash Flow	1-6	$21,000	3.889	$81,669
Salvage value	6	$8,000	0.456	$3,648
Net Present Value		-$14,683

Project B
Item	Years	Amount of cash flow	14% factor	Present value of cash flow
Working Capital investment	Now	-$100,000	1.000	-$100,000
Annual Cash Flow	1-6	$16,000	3.889	$62,224
Release of Working Capital	6	$100,000	0.456	$45,600
Net Present Value		$7,824

The Net present value is as under :

Project A ($14,683)

Project B $7,824

Since, Project B has positive Net present value, it is recommended for approval.