Perit Industries has $125,000 to invest. The company is trying to decide between

Question

Perit Industries has $125,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are Project A Project B $125,000 $ Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project 0 $125,000 $ 23,000 71,000 $ 8,900 6 years 6years 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

1) net present value of project A =($34,123)

particulars

    years

amount of cash inflows

15 % factor

present value of cash inflows

Project A

cost if the equipment

($125,000)

1

($125,000)

annual cash inflows

1 to 6 years

$23,000

(PVF at 15% for 6 years ) = 3.784

$87,032

salvage value of the equipment

6

$8,900

(PV at 15% for 6 years ) = 0.432

$3,845

net present value

($34,123)

2) net present value of project B =$197,664

particulars

    years

amount of cash inflows

15 % factor

present value of cash inflows

Project B

working capital equipment

($125,000)

1

($125,000)

annual cash inflows

1 to 6 years

$71,000

(PVF at 15% for 6 years ) = 3.784

$268,664

working capital released

6

$125,000

(PV at 15% for 6 years ) = 0.432

$54,000

net present value

$197,664

3) Project B has a positive net present value($197,664), whereas Project A has a negative net present value ($34,123).

therefore company should invest($125,000) in project B rather than project A

particulars

    years

amount of cash inflows

15 % factor

present value of cash inflows

Project A

cost if the equipment

($125,000)

1

($125,000)

annual cash inflows

1 to 6 years

$23,000

(PVF at 15% for 6 years ) = 3.784

$87,032

salvage value of the equipment

6

$8,900

(PV at 15% for 6 years ) = 0.432

$3,845

net present value

($34,123)

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