Question

Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2]

Perit Industries has $165,000 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	$	165,000	$	0
Working capital investment required	$	0	$	165,000
Annual cash inflows	$	21,000	$	56,000
Salvage value of equipment in six years	$	9,500	$	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%.

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

1
Project A:
	Year(s)	Amount of Cash Inflows	PV factor	Present Value of Cash Flows
Cost of the equipment	Now	-165000	1	-165000
Annual cash inflows	1-6	21000	3.889	81669
Salvage value of the equipment	6	9500	0.456	4332
Net present value Project A				-78999
2
Project B:
Working capital investment	Now	-165000	1	-165000
Annual cash inflows	1-6	56000	3.889	217784
Working capital released	6	165000	0.456	75240
Net present value Project B				128024
3
Project B should be accepted