Question

Perit Industries has $120,000 to invest. The company is trying to decide between two alternative uses...

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?

Homework Answers

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
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