Question

In: Accounting

Perit Industries has $110,000 to invest. The company is trying to decide between two alternative uses...

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?

Solutions

Expert Solution

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

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