Rushforth Manufacturing has $100,000 to invest in either Project A or Project B.

Question

Rushforth Manufacturing has $100,000 to invest in either Project A or Project B. The folllowing data are available on these projects: Project A: Cost of equipment needed now $90,000 Working capital investement needed now $10,000 Annual cash operating inflows $30,000 Salvage value of equipment in 6 years $15,000 Project B: Cost of equipment needed now $40,000 Working capital investment needed now $60,000 Annual cash operating inflows $25,000 Salvage value of equipment in 6 years $10,000 Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Rushforth's required rate of return is 14%. The net present value of Project A is: The net present value of Project B is:

Explanation / Answer

Hi,

Please find the detailed answer as follows:

NPV is the difference between the present value of cash inflows and the present value of cash outflows.

NPV (Project A) = -90000 - 10000 + 30000/(1+.14)^1 + 30000/(1+.14)^2 + 30000/(1+.14)^3 + 30000/(1+.14)^4 + 30000/(1+.14)^5 + 30000/(1+.14)^6 + 15000/(1+.14)^6 + 10000/(1+.14)^6 = $28049.69

NPV (Project B) = -40000 - 60000 + 25000/(1+.14)^1 + 25000/(1+.14)^2 + 25000/(1+.14)^3 + 25000/(1+.14)^4 + 25000/(1+.14)^5 + 25000/(1+.14)^6 + 60000/(1+.14)^6 + 10000/(1+.14)^6 = $29107.75

Project B should be selected as it offers a higher NPV.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.