Perit Industries has $115,000 to invest. The company is trying to decide between
ID: 2571100 • Letter: P
Question
Perit Industries has $115,000 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 AProject B $0 $0 S115,000 $69,000 $0 6 years $115,000 $21,000 $8,700 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 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 valueExplanation / Answer
Net present value (NPV) is the difference between present value of cash inflows and initial investments.
NPV of project A:
Year
Cash flows (CF)
Factor (F) = 1/(1+0.15)^n
PV = CF × F
0
-115,000
1
-115,000
1
21,000
0.8696
18,261.60
2
21,000
0.7561
15,878.10
3
21,000
0.6575
13,807.50
4
21,000
0.5718
12,007.80
5
21,000
0.4972
10,441.20
6
21,000 + 8,700 = 29,700
0.4323
12,839.31
-31,764.49
Note: Salvage value is added in the 6th year.
Answer: NPV of project A is -$31,764.49
NPV of project B:
Year
Cash flows (CF)
Factor (F) = 1/(1+0.15)^n
PV = CF × F
0
-115,000
1
-115,000
1
69,000
0.8696
60,002.40
2
69,000
0.7561
52,170.90
3
69,000
0.6575
45,367.50
4
69,000
0.5718
39,454.20
5
69,000
0.4972
34,306.80
6
69,000 + 115,000 = 184,000
0.4323
79,543.20
195,845
Note: Working capital released has been added in the 6th year.
Answer: NPV of project B is $195,845.
Year
Cash flows (CF)
Factor (F) = 1/(1+0.15)^n
PV = CF × F
0
-115,000
1
-115,000
1
21,000
0.8696
18,261.60
2
21,000
0.7561
15,878.10
3
21,000
0.6575
13,807.50
4
21,000
0.5718
12,007.80
5
21,000
0.4972
10,441.20
6
21,000 + 8,700 = 29,700
0.4323
12,839.31
-31,764.49
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