Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2] Perit Indu

Question

Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2] Perit Industries has $210,000 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 Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project $210,000 $ 0 $210,000 30,000 52,000 9,100 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 15%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables Required: 1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 2. Compute the net present value of Project B. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 3. Which investment alternative (if either) would you recommend that the company accept? 1. Net present value project A 2. Net present value project B Which investment alternative (if either) would you recommend that the company accept?

Explanation / Answer

Statement showing Cash flows Project A Project B Particulars Time PVf 15% Amount PV Cash Outflows                                 -                              1.00             (210,000.00)            (210,000.00)           (210,000.00)     (210,000.00) PV of Cash outflows = PVCO            (210,000.00)     (210,000.00) Cash inflows                            1.00                        0.8696                  30,000.00                 26,086.96                52,000.00          45,217.39 Cash inflows                            2.00                        0.7561                  30,000.00                 22,684.31                52,000.00          39,319.47 Cash inflows                            3.00                        0.6575                  30,000.00                 19,725.49                52,000.00          34,190.84 Cash inflows                            4.00                        0.5718                  30,000.00                 17,152.60                52,000.00          29,731.17 Cash inflows                            5.00                        0.4972                  30,000.00                 14,915.30                52,000.00          25,853.19 Cash inflows                            6.00                        0.4323                  30,000.00                 12,969.83                52,000.00          22,481.03 Cash inflows - Salvage value                            6.00                        0.4323                    9,100.00                   3,934.18                         -   Cash inflows - Recvery of WC                            6.00                        0.4323                                -                210,000.00          90,788.80 PV of Cash Inflows =PVCI              117,468.66        287,581.90 NPV= PVCI - PVCO              (92,531.34)          77,581.90 Company should accept project B

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