Question

Perit Industries has $100,000 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	$100,000	$0
Working capital investment required	$0	$100,000
Annual cash inflows	$21,000	$15,750
Salvage value of equipment in six years	$8,000	$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 14%. (Ignore income taxes.)

Solve this problem using your financial calculator or Excel, NOT the tables in the chapter.

Required:

(a)	Calculate net present value for each project. (Negative amount should be indicated by a minus sign. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

	Net present value
Project A	??????$
Project B	???????$

Answer 1

		Project A	Project B
	Cost of equipment required	1,00,000	0
	Working capital investment required	0	1,00,000
	Annual cash inflows	21,000	15,750
	Salvage value of equipment in six years	8,000	0
	Life of the project	6 years	6 years
	Discount Rate	14%
	Calculation of Net Present Value
				Present Value
Year	Discount Factor	Project A	Project B	Project A	Project B
0	1.00	-100000	-100000	-100000	-100000
1	0.88	21000	15,750	18480	13860
2	0.77	21000	15,750	16170	12128
3	0.67	21000	15,750	14070	10553
4	0.59	21000	15,750	12390	9293
5	0.52	21000	15,750	10920	8190
6	0.46	29000	1,15,750	13340	53245
		(21000+8000)	(15750+100000)
		Salavage Recovered	WC Recovered
		Net Present Value		-14630	7268
		NPV
	Project A	-14630
	Project B	7267.5