Perit Industries has $130,000 to invest. The company is trying to decide between
ID: 2500290 • Letter: P
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.
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
project A:
Net present value = present value of cash flows - present value of cash
Total cash flow for year 6 = 21,000 + 8,100 = 29,100
Net present value = -130,000 + 21,000 / ( 1 + 0.17)1 + 21,000 / ( 1 + 0.17)2 + 21,000 / ( 1 + 0.17)3 + 21,000 / ( 1 + 0.17)4 + 21,000 / ( 1 + 0.17)5 + 29,100 / ( 1 + 0.17)6
Net present value = -$51,469.43
Project B:
Net present value = present value of cash flows - present value of cash
Total cash flow for year 6 = 65,000 + 130,000 = 195,000
Net present value = -130,000 + 65,000 / ( 1 + 0.17)1 + 65,000 / ( 1 + 0.17)2 + 65,000 / ( 1 + 0.17)3 + 65,000 / ( 1 + 0.17)4 + 65,000 / ( 1 + 0.17)5 + 195,000 / ( 1 + 0.17)6
Net present value = $153.976
Net present value = -51,469.43
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