Perit Industries has $100,000 to invest. The company is trying to decide between

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 $16,000
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.)

To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.

Calculate net present value for each project.

Explanation / Answer

Item

Year(s)   

Amount of
Cash
Flows

14%
Factor

Present Value of
Cash Flows

  Project A:

     Cost of the equipment

Now

$(100,000)

1.000

$(100,000)    

     Annual cash inflows

1-6

$21,000

3.889

81,669     

     Salvage value of the equipment

6

$8,000

0.456

3,648     

     Net present value

$(14,683)   

  Project B:

     Working capital investment

Now

$(100,000)

1.000

$(100,000)    

     Annual cash inflows

1-6

$16,000

3.889

62,224     

     Working capital released

6

$100,000

0.456

45.600     

     Net present value

$7,824

NPV Project A = -14,683

NPV Project B = 7,824

Note make sure the discount rate matches with the tables.exhibits, becasue you didnt provide them. Hope this helps.

Item

Year(s)   

Amount of
Cash
Flows

14%
Factor

Present Value of
Cash Flows

  Project A:

     Cost of the equipment

Now

$(100,000)

1.000

$(100,000)    

     Annual cash inflows

1-6

$21,000

3.889

81,669     

     Salvage value of the equipment

6

$8,000

0.456

3,648     

     Net present value

$(14,683)   

  Project B:

     Working capital investment

Now

$(100,000)

1.000

$(100,000)    

     Annual cash inflows

1-6

$16,000

3.889

62,224     

     Working capital released

6

$100,000

0.456

45.600     

     Net present value

$7,824

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