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

ID: 2471933 • Letter: P

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%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: a. Calculate net present value for each project. (Negative amounts should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)

Explanation / Answer

Project A
Year                           Payment                           PVIF @ 14%                           Present Value
0                           -100,000                           1.000000                           -100,000
1                           21,000                           0.877193                           18,421.05
2                           21,000                           0.769468                           16,158.82
3                           21,000                           0.674972                           14,174.40
4                           21,000                           0.592080                           12,433.69
5                           21,000                           0.519369                           10,906.74
6                           29,000                           0.455587                           13,212.01
Net Present Value (Annuity Due) T= 0 to N-1                           -14,693.29

Project B
Year                           Payment                           PVIF @ 14%                           Present Value
0                           -100,000                           1.000000                           -100,000
1                           16,000                           0.877193                           14,035.09
2                           16,000                           0.769468                           12,311.48
3                           16,000                           0.674972                           10,799.54
4                           16,000                           0.592080                           9,473.28
5                           16,000                           0.519369                           8,309.90
6                           116,000                           0.455587                           52,848.04
Net Present Value (Annuity Due) T= 0 to N-1                           7,777.34

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