Question

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

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	$	25,000	$	57,000
Salvage value of equipment in six years	$	9,600	$	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

Year	Cash Flows - Project A	PV Factor @15%	PV of Cash Flows
0	-155000	1.00000	-155000
1	25000	0.86957	21739
2	25000	0.75614	18904
3	25000	0.65752	16438
4	25000	0.57175	14294
5	25000	0.49718	12429
6 (25000+9600)	34600	0.43233	14959
Net Present Value	- Project A		-56238
Year	Cash Flows - Project B	PV Factor @15%	PV of Cash Flows
0	-155000	1.00000	-155000
1	57000	0.86957	49565
2	57000	0.75614	43100
3	57000	0.65752	37478
4	57000	0.57175	32590
5	57000	0.49718	28339
6 (57000+155000)	212000	0.43233	91653
Net Present Value	- Project B		127726

$155000, should be invested in Project B rathre than Project A. Project B has positive NPV, whereas Project A has negative NPV.

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