Question

Janel Industries has $150,000 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	150,000	0
Working capital investment required	0	150,000
Annual cash inflows	31,000	16,000
Salvage value of equipment in five years	25,000	0
Life of the project	5 Years	5 Years

The working capital needed for project B will be released at the end of fifth years for investment elsewhere. Janel Industries’ discount rate is 8%.

Required:

1. What is the present value of the salvage value of equipment in Project A?

2. Compute the net present value of Project A.

3. Compute the net present value of Project B.

4. Which investment alternative (if either) would you recommend that the company accept?

Answer 1

Answer:

Particulars	Year(s)	Amount of cash flows	20% Factor	Present value of cash flows
Project A
Cost of equipment (Cash out flow)	0	$150,000		$150,000
Annual cash flows	1-5	31,000	3.9927	123,774
Salvage value of the equipment	5	25,000	0.6806	17,015
Net present value (PV of cash inflows –PV of cash out flows)				(9,211)
Project B
Working capital investment	0	$150,000		150,000
Annual cash flows	1-5	16,000	3.9927	63,883
Working capital released	5	150,000	0.6806	102,090
Net present value				$15,973

B.

As per the above results company should accept Project B. because of Positive NPV