Question

Question 6 15 Marks

PG has R100,000 to invest. The company is trying to decide between two alternative use of funds. The alternatives are:

Project A Project B
Cost of equipment required   R100,000 R0
Working capital investment required R0 R100,000
Annual cash inflow R21,000 R16,000
Salvage value of equipment in six years R8,000 R0
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. PG’s discount is 14%.

Required:
Which investment alternative (if either) would you recommend that the company accept? Show all
calculations using the net present value method. Prepare separate calculations for each project.

Answer 1

here in the excel sheet we see the NPV of project A is negative and also less than project B so project B should be selected because it has positive NPV