Question

Perrot Industries has $350,000 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	$	305,000			—
Working capital investment required		—		$	305,000
Annual cash inflows		70,400			59,900
Salvage value of equipment in six years		23,400			—
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. Perrot Industries’ discount rate is 13%.

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 be indicated with a minus sign. Round discount factor(s) to 3 decimal places. Round other intermediate calculations and final answers to the nearest whole number.)

1-b. Which investment alternative (if either) would you recommend that the company accept?

multiple choice

• Project A

• Project B

Answer 1

Project A
Year	Cash inflows	x	PVF @ 13% , 6 Years	Present Value of Cash Inflows
1 to 6	70,400	x	3.998	281459.2
Year 6	23,400	x	0.48	11232
				292691.2
Less: Initial Investment				-3,05,000
Net present value				-12,309
Project B
Year	Cash inflows	x	PVF @ 13% , 6 Years	Present Value of Cash Inflows
1 to 6	59,900	x	3.998	239480.2
Year 6	3,05,000	x	0.48	146400
				385880.2
Less: Initial Investment				-3,05,000
Net present value				80,880
Project B Should be Accepted