Question

Perit Industries has $140,000 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	$140,000	$0
Working capital investment required	$0	$140,000
Annual cash inflows	$23,000	$67,000
Salvage value of equipment in six years	$8,500	$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 17%.

  

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

  

Required:

a.	Calculate net present value for each project.

     

b.	Which investment alternative (if either) would you recommend that the company accept?
	Project B Project A

rev: 12_08_2015_CS-35602, 08_18_2016_QC_CS-56848, 11_10_2016_QC_CS-66978, 11_26_2016_QC_CS-70603

References

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Answer 1

Statement showing Cash flows			Project A		Project B
Particulars	Time	PVf 17%	Amount	PV
Cash Outflows	-	1.00	(140,000.00)	(140,000.00)	(140,000.00)	(140,000.00)
PV of Cash outflows = PVCO				(140,000.00)		(140,000.00)
Cash inflows	1.00	0.8547	23,000.00	19,658.12	67,000.00	57,264.96
Cash inflows	2.00	0.7305	23,000.00	16,801.81	67,000.00	48,944.41
Cash inflows	3.00	0.6244	23,000.00	14,360.52	67,000.00	41,832.83
Cash inflows	4.00	0.5337	23,000.00	12,273.95	67,000.00	35,754.55
Cash inflows	5.00	0.4561	23,000.00	10,490.56	67,000.00	30,559.45
Cash inflows	6.00	0.3898	23,000.00	8,966.29	67,000.00	26,119.19
Cash inflows - Salvage value	6.00	0.3898	8,500.00	3,313.63		-
Cash inflows - Recvery of WC	6.00	0.3898		-	140,000.00	54,577.40
PV of Cash Inflows =PVCI				85,864.88		295,052.78
NPV= PVCI - PVCO				(54,135.12)		155,052.78
Project B should be accepted