Perit Industries has $120,000 to invest. The company is trying to decide between
ID: 2522939 • Letter: P
Question
Perit Industries has $120,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are Cost of equipment required Working capita vestment required Annual cash inflows Salvage value of equipment in six years Life of the project Project AProject B $0 $0 $120,000 $70,000 $0 years 120,000 $22,000 $8,800 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 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 B Net present value b. Which investment alternative (if either) would you recommend that the company accept? O Project B O Project AExplanation / Answer
Project A Project B
Initial Cost $120,000 $0
Working Capital requirement $0 $120,000 at the end of 6th Year
Salvage value(in 6th year $8,800 $0
Annual Cash Inflows $22,000 $ 70,000
Cost Of Capital for both projects is 14%
PV Annuity factor for 14% for 6 years is 3.889
PV factor at 14% for 6 years is 0.456
Project A- Inflows
PV of cash inflows of $22,000 for 6 years is = $22,000*3.889= $85,558
Salvage Value = $8,800*0.456= $4012.8
PV of Total Inflows = $89,570.8 Cash outflow= $120,000
NPV = $$89,570.8- $120,000=$(30429.2)
Project B-
PV of cash inflows of $07,000 for 6 years is = $70,000*3.889= $299,453
Cash outflow- Working Capital $120,000 in 6th years Initial outflow = $0 Total Cash outflow = $120,000
PV of Total Inflows = $299,453
NPV = $299,453- $120,000=$179,453
b. The company should accept Project B as NPV is positive for it.
Project A Project B Net Present Value $(30429.2) $179,453Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.