Perit Industries has $130,000 to invest. The company is trying to decide between

Question

Perit Industries has $130,000 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 17%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Exhibit 13B-1:

Exhibit 13B-2:

Calculate net present value for each project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)

Perit Industries has $130,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

Explanation / Answer

a)

Project A

Net present value = -Initial Investment + Annual Cash Inflow*PVIFA(rate,nper) + Salvage Value*PVIF(rate,nper)

Net present value = -130000 + 21000*PVIFA(17%,6) + 8100*PVIF(17%,6)

Net present value = -130000 + 21000*3.589 + 8100*0.390

Net present value = -51472

Project B

Net present value = -Initial Investment + Annual Cash Inflow*PVIFA(rate,nper) + Working Capital recovered*PVIF(rate,nper)

Net present value = -130000 + 65000*PVIFA(17%,6) + 130000*PVIF(17%,6)

Net present value = -130000 + 65000*3.589 + 130000*0.390

Net present value = 153985

b)

Project B

Since Project B NPV is positive and it is greater than Project A

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