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 A		Project 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?

Explanation

1.

Project A:

	Now			Years 1-6		Year 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:

	Now			Years 1-6		Year 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