Perit Industries has $100,000 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 $100,000 $0
Working capital investment required $0 $100,000
Annual cash inflows $21,000 $15,750
Salvage value of equipment in six years $8,000 $0
Life of the project 6 years 6 years
The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%. (Ignore income taxes.)
Solve this problem using your financial calculator or Excel, NOT the tables in the chapter.
Required:
(a) Calculate net present value for each project. (Negative amount should be indicated by a minus sign. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
Solution a:
| Computation of NPV - Perit Industries | ||||||
| Project A | Project B | |||||
| Particulars | Period | PV Factor (14%) | Amount | Present Value | Amount | Present Value |
| Cash outflows: | ||||||
| Cost of equipment | 0 | 1 | $100,000 | $100,000 | $0 | $0 |
| Investment in working capital | 0 | 1 | $0 | $0 | $100,000 | $100,000 |
| Present Value of Cash outflows (A) | $100,000 | $100,000 | ||||
| Cash Inflows | ||||||
| Annual cash inflows | 1-6 | 3.88867 | $21,000 | $81,662 | $15,750 | $61,247 |
| Salvage value | 6 | 0.45559 | $8,000 | $3,645 | $0 | $0 |
| Release of working capital | 6 | 0.45559 | $0 | $0 | $100,000 | $45,559 |
| Present Value of Cash Inflows (B) | $85,307 | $106,806 | ||||
| Net Present Value (NPV) (B-A) | -$14,693 | $6,806 | ||||
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