Perit Industries has $220,000 to invest. The company is trying to decide between

Question

Perit Industries has $220,000 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 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?

Project A Project B Cost of equipment required $ 220,000 $ 0 Working capital investment required $ 0 $ 220,000 Annual cash inflows $ 31,000 $ 53,000 Salvage value of equipment in six years $ 9,200 $ 0 Life of the project 6 years 6 years

Explanation / Answer

Project A: Year(s) Amount of Cash Inflows 15% Factor Present Value of Cash Flows Cost of the equipment Now -220000 1 -220000 Annual cash inflows 1-6 31000 3.784 117304 Salvage value of the equipment 6 9200 0.432 3974 Net present value -98722 Project B: Year(s) Amount of Cash Inflows 15% Factor Present Value of Cash Flows Working capital investment Now -220000 1 -220000 Annual cash inflows 1-6 53000 3.784 200552 Working capital released 6 220000 0.432 95040 Net present value 75592 3 project B should be accepted

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