Perit Industries has $140,000 to invest. The company is trying to decide between

Question

Perit Industries has $140,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: $140,000 0 $140,000 Annual cash inflows $ 26,000 60,000 9,700 $ Life of the project The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 17% Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factoris) using tables Enter segetive akues with aminus sign 2. Compute the net present value of Project B. (Enter negative values with a minus sign.) 3. Which investment alternative (if either) would you recommend that the company accept?

Explanation / Answer

3)company should accept project B as NPV is positive and higher than A.

A B Present value of cash Inflows [PVA17%,6*annual cash flow ]+[PVF17%,6*Salvage] [PVA17%,6*annual cash flow ]+[PVF17%,6*working capital] [3.58918*26000]+[.38984*9700] [3.58918*60000]+[.38984*140000] 93318.68+ 3781.45 215350.8+ 54577.6 Present value 97100.13 269928.4 less:Initial investment -140000 -140000 NPV -42899.87     [97100.13-140000] 129928.4      [269928.4-140000]

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