4 Perit Industries has $165,000 to invest. The company is trying to decide betwe

Question

4 Perit Industries has $165,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are Project A Project E $165,000 Cost of equipment required Working capital investment $165,000 required $21,000 $56,000 Annual cash inflows Salvage value of equipment in Life of the project $9,500 6 years six years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Pent Industries, discount rate is 14% 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 value b. Which investment alternative (if either) would you recommend that the company accept? Project B ProjectA

Explanation / Answer

a. Net Present value of both the projects is as calculated below:

Project B should be accepted as project B is generating positive net present value.

Project A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total Cost of equipment required ($165,000) ($165,000) Working Capital investment required $0 $0 Annual cash inflows 21,000 21,000 21,000 21,000 21,000 21,000 $126,000 Salvage value of equipment 9,500 $9,500 Net Cash Flow ($165,000) $21,000 $21,000 $21,000 $21,000 $21,000 $30,500 ($29,500) Discount rate 14% , Life 6 years Present Value factor 1 0.877 0.769 0.675 0.592 0.519 0.456 Present Value of Net Cash flow -165,000 18,421 16,159 14,174 12,434 10,907 13,895 ($79,010) Net Present value -165,000 18,421 16,159 14,174 12,434 10,907 13,895 ($79,010) Project A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total Cost of equipment required $0 $0 Working Capital investment required ($165,000) 165,000 $0 Annual cash inflows 56,000 56,000 56,000 56,000 56,000 56,000 $336,000 Salvage value of equipment 0 $0 Net Cash Flow ($165,000) $56,000 $56,000 $56,000 $56,000 $56,000 $221,000 $336,000 Discount rate 14% , Life 6 years Present Value factor 1 0.877 0.769 0.675 0.592 0.519 0.456 Present Value of Net Cash flow -165,000 49,123 43,090 37,798 33,156 29,085 100,685 $127,937 Net Present value -165,000 49,123 43,090 37,798 33,156 29,085 100,685 $127,937

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