Question

Perit Industries has $110,000 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	$	110,000	$	0
Working capital investment required	$	0	$	110,000
Annual cash inflows	$	20,000	$	28,000
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 15%.

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
Cost of Equipment	110000
Annual Cash Inflows	20000
Present Value Annuity Factor @ 15% for 6Years	3.7845
Salvage Value	8100
PV Factor @ 15% 6th Year	0.4323
Present Value of Cash Inflows	$     75,689.65
Present Value of Salvage Value	$       3,501.85
Net Present Value of Cash Inflows	$     79,191.51
NPV	$   -30,808.49
Project B
Working Capital	$ 1,10,000.00
Annual Cash Inflows	28000
Present Value Annuity Factor @ 15% for 6Years	3.7845
Working Capital	110000
PV Factor @ 15% 6th Year	0.4323
Present Value of Cash Inflows	$ 1,05,965.52
Present Value of Release of Working Capital	$     47,556.04
Net Present Cash Inflow	$ 1,53,521.55
NPV	$     43,521.55
Project B is Better since it is having Positive Cash Flow