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 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.
| Project A: | ||||
| Year(s) | Amount of Cash Inflows | PV factor | Present Value of Cash Flows | |
| Cost of the equipment | Now | -175000 | 1 | -175000 |
| Annual cash inflows | 1-6 | 27000 | 3.784 | 102168 |
| Salvage value of the equipment | 6 | 8800 | 0.432 | 3802 |
| Net present value | -69030 | |||
| Project B: | ||||
| Working capital investment | Now | -175000 | 1 | -175000 |
| Annual cash inflows | 1-6 | 44000 | 3.784 | 166496 |
| Working capital released | 6 | 175000 | 0.432 | 75600 |
| Net present value | 67096 | |||
| Project B should be accepted |
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