Wriston Company has $250,000 to invest. The company is trying to decide between

Question

Wriston Company has $250,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:

The working capital needed for project B will be released for investment elsewhere at the end of six years. Wriston Company uses a 12% discount rate. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Calculate net present value for each project. (Negative amounts should be indicated by a minus sign.Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)

Wriston Company has $250,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:

Wriston Company has $250,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows: The working capital needed for project B will be released for investment elsewhere at the end of six years. Wriston Company uses a 12% discount rate. (Ignore income taxes.) a. Calculate net present value for each project. (Negative amounts should be indicated by a minus sign.Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)

Explanation / Answer

Hi,

Please find the answer as follows:

NPV (Project A) = -250000 + 98000*PVIFA*(12%, 6 Years) + 20000*PVIF(12%, 6 Years) = -250000 + 98000*4.111 + 20000*.507 = 163018

NPV (Project B) = -250000 + 70000*(12%, 6 Years) + 250000*PVIF(12%, 6 Years) = -250000 + 70000*4.111 + 250000*.507 = 164520

Thanks.

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