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

Question

Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%. (Ignore income taxes.) Solve this problem using your financial calculator or Excel, NOT the tables in the chapter. Calculate net present value for each project. (Negative amount should be indicated by a minus sign. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.) Which investment alternative (if either) would you recommend that the company accept?

Explanation / Answer

Hi, NPV will be calculated as follows: Project A = 21000/(1 + .14)^1 + 21000/(1 + .14)^2 + 21000/(1 + .14)^3 + 21000/(1 + .14)^4 + 21000/(1 + .14)^5 + 29000/(1 + .14)^6 = 18421.05 + 16158.82 + 14174.40 + 12433.69 + 10906.74 + 13212.01 = 85306.71 NPV = 85306.71 - 100000 = -14693.30 Project B = 15750/(1 + .14)^1 + 15750/(1 + .14)^2 + 15750/(1 + .14)^3 + 15750/(1 + .14)^4 + 15750/(1 + .14)^5 + 115750/(1 + .14)^6 = 13815.79 + 12119.11 + 10630.80 + 9325.26 + 8180.06 + 52734.14 = 106805.20 NPV = 106805.20 - 100000 = 6805.20 Project B should be accepted because it has a positive NPV. Thanks, Aman

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