Perit Industries has $170,000 to invest. The company is tryingto decide between two alternative uses of the funds. Thealternatives are:
Project A Project B Cost of equipmentrequired $170,000 $0 Working capitalinvestment required $0 $170,000 Annual cashinflows $26,000 $43,000 Salvage value ofequipment in six years $8,700 $0 Life of theproject 6 years 6 years
The working capital needed for project B will be released at theend of six years for investment
elsewhere. Perit Industriesâ discount rate is 14%.
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determinethe appropriate discount factor(s) using tables.
Required:
a. Calculate net present value for each project.
b. Which investment alternative (ifeither) would you recommend that the company accept? Project A Project B
Perit Industries has $170,000 to invest. The company is tryingto decide between two alternative uses of the funds. Thealternatives are: |
| Project A | Project B | |
| Cost of equipmentrequired | $170,000 | $0 |
| Working capitalinvestment required | $0 | $170,000 |
| Annual cashinflows | $26,000 | $43,000 |
| Salvage value ofequipment in six years | $8,700 | $0 |
| Life of theproject | 6 years | 6 years |
The working capital needed for project B will be released at theend of six years for investment |
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determinethe appropriate discount factor(s) using tables. |
| Required: |
| a. | Calculate net present value for each project. |
| b. | Which investment alternative (ifeither) would you recommend that the company accept? | ||||
|
Related questions
Perit Industries has $130,000 to invest. The company is tryingto decide between two alternative uses of the funds. Thealternatives are:
| Project A | Project B | |||
| Cost of equipment required | $ | 130,000 | $ | 0 |
| Working capital investmentrequired | $ | 0 | $ | 130,000 |
| Annual cash inflows | $ | 21,000 | $ | 65,000 |
| Salvage value of equipment insix years | $ | 8,100 | $ | 0 |
| Life of the project | 6 years | 6 years | ||
The working capital needed for project B will be released at theend of six years for investment elsewhere. Perit Industriesâdiscount rate is 17%.
Required:
1. Compute the net present value of Project A. (Enternegative values with a minus sign. Round your final answer to thenearest whole dollar amount.)
2. Compute the net present value of Project B. (Enternegative values with a minus sign. Round your final answer to thenearest whole dollar amount.)
3. Which investment alternative (if either) would you recommendthat the company accept?
