Perit Industries has $110,000 to invest. The company is trying to decide between

Question

Perit Industries has $110,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project Project A $110,000 $O $20,000 $8,600 6 years Project B $0 $110,000 $68,000 $0 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Pent Industries' discount rate is 16% Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables Required a. Calculate net present value for each project. Project A Project E Net present value b. Which investment alternative (if either) would you recommend that the company accept? Project A Project B

Explanation / Answer

Net Present Value of Project A:

Net Present Value of Project B:

Hence Project B to be selected as the project is viable and Net present value is positive

Year Cash Inflow Present Value @ 16% Present Value of Cash flow 1 20000 0.8620 17240 2 20000 0.7432 14864 3 20000 0.6406 12812 4 20000 0.5523 11046 5 20000 0.4761 9522 6 28600 (including Salvage value of $ 8600) 0.4104 11737 Present Value of Cash Inflows Total 77221 Present Value of Cash Outflows 110000 Net Outflow of Cash (NPV) 32779

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