Question

Perit Industries has $120,000 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 $120,000 $ 0 $ 0 $120,000 $ 22,000 $ 70,000 $ 8,800 $ 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 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value of Project A. (Enter negative value 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 value 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? 2. Na 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

Answer-1)- Net present value of Project A = ($30429).

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)	22000	3.889	85558
New Equipment (1st Year)	-120000	1	-120000
Salvage value (6th year)	8800	0.456	4013
Net Present Value			-30429

2)-- Net present value of Project A = $206950.

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)	70000	3.889	272230
Working capital investment (1st Year)	-120000	1	-120000
Working capital released (6th year)	120000	0.456	54720
Net Present Value			206950

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