Riston Company has $400,000 to invest. The company is trying to decide between t

Question

Riston Company has $400,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows: The working capital needed for project B will be released for investment elsewhere at the end of five years. Wrist on Company uses a 10% discount rate. (Ignore income taxes.) Calculate net present value for each project. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.) Net Present Value Which investment alternative (if either) would you recommend that the company accept?

Explanation / Answer

Answer : (a) Net preset Value

Project A $ -100706

Project B $ 94815

Answer (b) We recommend Project B, Which have positive NPA of $ 94815. Company should accept project 'B'.

Net Present Value Project (A) Project (B) Annual Cash Inflow (a) 76000.000 65000.000 PVFIA @ 10%, 5 Years (b) 3.791 3.791 Present value of Cash inflow (c) = (a)*(b) 288116.000 246415.000 Salvage Value/Working Capital released (d) 18000.000 400000.000 PV factor @ 10%, 5 years (e) 0.621 0.621 Present value of Salvage/WC released (f) = (d)*(e) 11178.000 248400.000 Total Present Value of Projects (g) = (c)+(f) 299294.000 494815.000 Less Initial Investment (h) 400000.000 400000.000 Net Present Value (I) = (g)-(h) -100706.000 94815.000

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