Question

Perit Industries has $220, 000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 15%. Required: Calculate net present value for each project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)

Answer 1

Project A
year	Cash Flow	Discount @15%	Present value of cash flows
0	-220000	1	-220000
1	31000	0.869565	26956.52
2	31000	0.756144	23440.45
3	31000	0.657516	20383
4	31000	0.571753	17724.35
5	31000	0.497177	15412.48
6	31000	0.432328	13402.16
6	9200	0.432328	3977.414
Net Present value			-98703.6
Project B
year	Cash Flow	Discount @15%	Present value of cash flows
0	-220000	1	-220000
1	53000	0.869565	46086.96
2	53000	0.756144	40075.61
3	53000	0.657516	34848.36
4	53000	0.571753	30302.92
5	53000	0.497177	26350.37
6	53000	0.432328	22913.36
6	220000	0.432328	95112.07
Net Present value			75689.65
Conclusion: As the Net present value of project B is positive and thus select project B.