Question

Perit Industries has $110,000 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	$110,000	$0
Working capital investment required	$0	$110,000
Annual cash inflows	$20,000	$28,000
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 end of six years for investment elsewhere. Perit Industries’ discount rate is 15%.

Required:

a. Calculate net present value for each project.

	Project A	Project B
Net present value

b. Which investment alternative (if either) would you recommend that the company accept? Project A Project B

Answer 1

Computation of Net Present Value of Project A
Description	Amount ($)
Initial Cash Outflow	-$110,000.00
Annual Cash inflow for Six Year ( $20000 X 3.784**)	$75,680.00
Salvage Value of Machine at 6 year ($8100X0.432***)	$3,499.20
Net Present Value	-$30,820.80
Hence, Net Present value is -$30820,

Computation of Net Present Value of Project B
Description	Amount ($)
Working Capital Investment	-$110,000.00
Annual Cash inflow for Six Year ( $28000 X 3.784**)	$105,952.00
Working Capital Released at end of year ( $110000X0.432***)	$47,520.00
Net Present Value	$43,472.00
Hence, Net Present value is -$44472

Net Present Value of project B is Positive hence, Project b can be accepted