Question

Perrot Industries has $355,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives follow:

    Project     
    A      B     
Cost of equipment required   $   310,000         —     
Working capital investment required      —      $   310,000     
Annual cash inflows      70,650         60,400     
Salvage value of equipment in six years      23,600         —     
Life of the project      5 years         5 years     

The working capital needed for project B will be released at the end of five years for investment elsewhere. Perrot Industries’ discount rate is 14%.

Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.

Required:

1-a. Calculate net present value for each project. (Negative amount should…

Answer 1

1. Net present value Project A	-55210
2. Net present value Project B	58243

Workings:
Project A:
	Year(s)	Amount of Cash Inflows	PV factor 14%	Present Value of Cash Flows
Cost of the equipment	Now	-310000	1	-310000
Annual cash inflows	1-5	70650	3.433	242541
Salvage value of the equipment	5	23600	0.519	12248
Net present value				-55210
Project B:
	Year(s)	Amount of Cash Inflows	PV factor 14%	Present Value of Cash Flows
Working capital investment	Now	-310000	1	-310000
Annual cash inflows	1-5	60400	3.433	207353
Working capital released	5	310000	0.519	160890
Net present value				58243