Question

Perit Industries has $130,000 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 $ 130,000 $ 0 Working capital investment required $ 0 $ 130,000 Annual cash inflows $ 21,000 $ 65,000 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 17%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

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

Answer 1

Project A	Year(s)	Amount of Cash Flows	17% Factor	Present Value of Cash Flows
Cost of the equipment	Now	-130000	1	-130000
Annual cash inflows	1-6	21000	3.589	75369
Salvage value of the equipment	6	8100	0.390	3159
Net present value				-51472

Project B	Year(s)	Amount of Cash Flows	17% Factor	Present Value of Cash Flows
Working capital	Now	-130000	1	-130000
Annual cash inflows	1-6	65000	3.589	233285
Salvage value of the equipment	6	130000	0.390	50700
Net present value				153985

3

Project B

Postive NPV