Question

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	$	35,000
Salvage value of equipment in six years	$	8,400	$	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 Industries’ discount rate is 15%.

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?

Answer 1

Answer:

Computation of NPV:

Project A:

Year	Cashflows	PVIF/PVIFA @ 15%	Present value of cash flows
0	($140,000)	1	($140,000)
1-6	$23,000	3.7845	$87,043.50
6	$8,400	0.4323	$3,631.32
NPV	($49,325.18)

Project B:

Year	Cashflows	PVIF/PVIFA @ 15%	Present value of cash flows
0	($140,000)	1	($140,000)
1-6	$35,000	3.7845	$132,457.50
6	$140,000	0.4323	$60,522
NPV	$52,979.50

As per NPV basis, investor should accept Project B which gives positive NPV.

Note: In Project B in the Year 6 cash flows are working capital realised amount of $140000