Tuesday 23 July 2019

Perit Industries has $170,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

Perit Industries has $170,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

 Project AProject B
Cost of equipment required$170,000$0
Working capital investment required$0$170,000
Annual cash inflows$26,000$43,000
Salvage value of equipment in six years$8,700$0
Life of the project 6 years 6 years


The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries’ discount rate is 14%.
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.
Project A:

 NowYears 1-6Year 6
Purchase of equipment$(170,000)    
Annual cash inflows   $26,000  
Salvage value     $8,700
Total cash flows (a)$(170,000)$26,000$8,700
Discount factor (14%) (b) 1.000  3.889 0.456
Present value (a) × (b)$(170,000)$101,114$3,967
Net present value$(64,919)    


Project B:

 NowYears 1-6Year 6
Working capital invested$(170,000)    
Annual cash inflows   $43,000  
Working capital released     $170,000
Total cash flows (a)$(170,000)$43,000$170,000
Discount factor (14%)(b) 1.000  3.889 0.456
Present value (a) × (b)$(170,000)$167,227$77,520
Net present value$74,747     


3.
The $170,000 should be invested in Project B rather than in Project A. Project B has a positive net present value whereas Project A has a negative net present value.




Thanks

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