Question

Perit Industries has $115,000 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 $ 115,000 $ 0 Working capital investment required $ 0 $ 115,000 Annual cash inflows $ 21,000 $ 69,000 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 Industriesâ discount rate is 15%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required:Calculate net present value for each project. Project A Project B Net present value

Answer 1

NPV for A = $31,764.61

NPV for B= $195,846.98

Step-by-step explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

For project A

Cash flow in year 0 = cost of equipment + working capital investment = $ -115,000

Cash flow each year from year 1 to 5 = 21,000

Cash flow in year 6 = year 6 cash flow + salvage value + working capital investment = $21,000 + $8,700 = $29,700

I = 15%

NPV = $31,764.61

For project B

Cash flow in year 0 = cost of equipment + working capital investment = $ -115,000

Cash flow each year from year 1 to 5 = 69,000

Cash flow in year 6 = year 6 cash flow + salvage value + working capital investment = 69,000 + 115,000 = $184,000

I = 15%

NPV = $195,846.98

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute