Perit Industries has $100,000 to invest. The company is trying to decide between

Question

Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B Cost of equipment required $100,000 $0 Working capital investment required $0 $100,000 Annual cash inflows $21,000 $15,750 Salvage value of equipment in six years $8,000 $0 Life of the project 6 years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%. (Ignore income taxes.) Solve this problem using your financial calculator or Excel, NOT the tables in the chapter. Required: (a) Calculate net present value for each project. (Negative amount should be indicated by a minus sign. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.) Net present value Project A $ Project B $ (b) Which investment alternative (if either) would you recommend that the company accept?

Explanation / Answer

Year(s) Amount of Cash Inflows PV factor Present Value of Cash Flows Project A: Cost of the equipment Now -100000 1 -100000 Annual cash inflows 1-6 21000 3.889 81669 Salvage value of the equipment 6 8000 0.456 3648 Net present value -14683 Project B: Working capital investment Now -100000 1 -100000 Annual cash inflows 1-6 15750 3.889 61252 Working capital released 6 100000 0.456 45600 Net present value 6852 Project B should be accepted

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