Question

# Perit Industries has \$155,000 to invest. The company is trying to decide between two alternative uses...

Perit Industries has \$155,000 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 \$ 155,000 \$ 0 Working capital investment required \$ 0 \$ 155,000 Annual cash inflows \$ 20,000 \$ 55,000 Salvage value of equipment in six years \$ 9,400 \$ 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 Industriesâ€™ discount rate is 14%.

Click here to view Exhibit 7B-1 and Exhibit 7B-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?

 Answer 1 Net present value (NPV): Project A PVA Annual cash inflows \$ 20,000 3.889 \$     77,780 Salvage value of equipment in six years \$    9,400 0.456 \$       4,286 Less- Outflow -\$   155,000 Net present value -\$     72,934 2 Net present value (NPV): Project B PVA Annual cash inflows \$ 55,000 3.889 \$   213,895 Salvage value of equipment in six years \$155,000 0.456 \$     70,680 Less- Outflow -\$   155,000 Net present value \$   129,575 3 Project B should be choosen. ** Present value of annuity at 14% for 6 years = 3.889 Present value factor at 14% for 6th year = 0.456

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