Question

Perit Industries has $210,000 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	$	210,000	$	0
Working capital investment required	$	0	$	210,000
Annual cash inflows	$	30,000	$	52,000
Salvage value of equipment in six years	$	9,100	$	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%.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net present value of Project A. (Enter negative value 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 value 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?

1.	Net present value project A
2.	Net present value project B
3.	Which investment alternative (if either) would you recommend that the company accept?

Answer 1

1. Net present value of Project A:

Net present value = Present value of cash inflow - Initial investment

Present value of cash inflow = $30,000*3.78448(PVAF@15%, 6years) + $9,100*0.43233(PVF@15%, 6th year)

Present value of cash inflow = $113,534 + 3,934 = $117,468

Net present value = $117,468 - $210,000 = -$92,532

2. Net present value of Project B:

Present value of cash inflow = $52,000*3.78448(PVAF@15%, 6years) + $210,000*0.43233(PVF@15%, 6th year)

Present value of cash inflow = $196,793 + 90,789 = $287,582

Net present value = $287,582 - $210,000 = $77,582

3.

The company should accept Project B