Question

Perit Industries has $120,000 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 | $ | 120,000 | $ | 0 |

Working capital investment required | $ | 0 | $ | 120,000 |

Annual cash inflows | $ | 22,000 | $ | 70,000 |

Salvage value of equipment in six years | $ | 8,800 | $ | 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

Project A: | ||||

Year(s) | Amount of Cash Inflows | PV factor | Present Value of Cash Flows | |

Cost of the equipment | Now | -120000 | 1 | -120000 |

Annual cash inflows | 1-6 | 22000 | 3.889 | 85558 |

Salvage value of the equipment | 6 | 8800 | 0.456 | 4013 |

Net present value of Project
A |
-30429 |
|||

Project B: | ||||

Working capital investment | Now | -120000 | 1 | -120000 |

Annual cash inflows | 1-6 | 70000 | 3.889 | 272230 |

Working capital released | 6 | 120000 | 0.456 | 54720 |

Net present value of Project
B |
206950 |
|||

Project B should be
accepted |

Perit Industries has
$130,000 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
$
130,000
$
0
Working capital
investment required
$
0
$
130,000
Annual cash
inflows
$
22,000
$
33,000
Salvage value of
equipment in six years
$
8,300
$
0
Life of the
project
6 years
6 years
The working capital
needed for project B will be released at the...

Perit Industries has $130,000 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 $
130,000 $ 0 Working capital investment required $ 0 $ 130,000
Annual cash inflows $ 21,000 $ 65,000 Salvage value of equipment in
six years $ 8,100 $ 0 Life of the project 6 years 6 years The
working capital needed for project B will be released at the...

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...

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...

Perit Industries has $130,000 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
$
130,000
$
0
Working capital investment
required
$
0
$
130,000
Annual cash inflows
$
21,000
$
65,000
Salvage value of equipment in
six years
$
8,100
$
0
Life of the project
6 years
6 years
The working capital needed for project B will be released at the...

Perit Industries has $210,000 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
$
210,000
$
0
Working capital investment required
$
0
$
210,000
Annual cash inflows
$
30,000
$
52,000
Salvage value of equipment in six years
$
9,100
$
0
Life of the project
6 years
6 years
The working capital needed for project B will be released at the...

JJ Industries has $150,000 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 $ 150,000 $ 0
Working capital investment required $ 0 $ 150,000 Annual cash
inflows $ 24,000 $ 37,000 Salvage value of equipment in six years $
8,500 $ 0 Life of the project 6 years 6 years The working capital
needed for project B will be released at the...

Perit Industries has $175,000 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
$
175,000
$
0
Working capital investment
required
$
0
$
175,000
Annual cash inflows
$
27,000
$
44,000
Salvage value of equipment in
six years
$
8,800
$
0
Life of the project
6 years
6 years
The working capital needed for project B will be released at the...

Perit Industries has $100,000 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 $100,000 $0
Working capital investment required $0 $100,000
Annual cash inflows $21,000 $15,750
Salvage value of equipment in six years $8,000 $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...

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...

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