Question

Top Notch Limited has $750,000 to invest and is trying to decide between two alternative uses of the funds. The alternatives are as follows:

	A		B
Cost of equipment required	$	750,000	$	0
Working capital investment required	$	0	$	750,000
Annual cash inflows	$	210,000	$	150,000
Salvage value of equipment in seven years	$	50,000	$	0
Life of the project		7 years		7 years

The working capital needed for Project B will be released for investment elsewhere at the end of seven years. Top Notch uses a 20% discount rate.

Required:
a. Calculate net present value for each project. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to the nearest whole dollar. Do not leave any empty spaces; input a 0 wherever it is required.)

** Please show the formulas on how to calculate each number in steps **

Answer 1

	Calculation of Net Present Value:
Year	Particulars	PVF(20%)	A		B
			Cash Flow	PV of CF	Cash Flow	PV of CF
0	Investment / Working Capital Investment	1	($750,000)	($750,000)	($750,000)	($750,000)
1 to 7	Annual Cash Inflows	3.604591764	$210,000	$756,964	$150,000	$540,689
7	Salvage Value / Release of Working Capital	0.279081647	$50,000	$13,954	$750,000	$209,311
	Net Present Value			$20,918		$0
		Year	PVF(20%)
		1	0.833333333
		2	0.694444444
		3	0.578703704
		4	0.482253086
		5	0.401877572
		6	0.334897977
		7	0.279081647
			3.604591764

Formulae used in the above calculations have been presented below for your reference: