Final answer:
Perit Industries is deciding between two investment alternatives: Project A and Project B. Project A has a payback period of 7 years, while Project B has a payback period of 4.04 years. The decision on which project to choose should consider various factors.
Step-by-step explanation:
Perit Industries has $210,000 to invest and is deciding between two alternatives: Project A and Project B. Project A requires a cost of equipment of $210,000 and no working capital investment, while Project B requires a working capital investment of $210,000 and no cost of equipment. Project A has annual cash inflows of $30,000 and a salvage value of $9,100 after six years, whereas Project B has annual cash inflows of $52,000 and no salvage value. Both projects have a life of six years.
To calculate the payback period for each project, we need to determine how long it will take for the savings to equal the initial investment. We can find this by dividing the initial investment by the annual cash inflows. For Project A, the payback period is $210,000 / $30,000 = 7 years. For Project B, the payback period is $210,000 / $52,000 = 4.04 years.
Based on these calculations, Project B has a shorter payback period compared to Project A. However, the decision to invest in a project should not be solely based on the payback period but also take into consideration other factors such as the company's goals, risk tolerance, and future cash flows.