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 :

Net present value = Present value of cash inflow-Present value of cash outflow

= (23000*3.784+8900*0.432)-125000

Net present value = -34123

2. Net present value of project B :

Net present value = Present value of cash inflow-Present value of cash outflow

= (71000*3.784+125000*0.432)-125000

Net present value = 197664

3. Project B Investment alternative should be accepted.

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