Lambert Manufacturing has $120,000 to invest in either Project A or Project B. T

Question

Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects (lgnore income taxes.): Project A Project B $120,000 $70,000 Cost of equipment needed now Working capital investment needed now Annual net operating cash inflows50,000 $45,000 Salvage value of equipment in 6 years $50,000 ? 15,000 Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using the tables provided Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. The net present value of Project B is closest to:

Explanation / Answer

NPV OF PROJECT B = PV OF ALL CASH FLOWS - INVESTMENT + PV OF WORKING CAPITAL RECOVERED

NPV OF PROJECT B = (45000 X PVIFA @14%, 6 YEARS) - (70000+50000) + (50000 XPVIF @14%, 6 YEARS)

NPV OF PROJECT B = (45000 X 3.889) - 120000 + (50000 X 0.456) = 77805

NPV PF PROJECT B = 77805

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