Answer:
Continuation of the question
Project A Project B
Cost of equipment required $135,000 $0
Working capital investment required $0 $135,000
Annual cash inflows $22,000 $66,000
Salvage value of equipment in six years $8,400 $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%.
Required:
a. Calculate net present value for each project.
b. Which investment alternative (if either) would you recommend that the company accept?
Note: The discount factor use are derived from Exhibit 11B-1 and Exhibit 11B-2
a. Net Present vale of Project A
Particulars Amount D. Factor Present cash flow
Annual cash inflow 1-6yrs $22,000 3.58918 $78,962.06
Salvage value for 6th years $8,400 0.38984 $3,274.64
Total cash inflows $82,236.71
Less: Initial investment $135,000 1.000 $135,000
Net present value -$52,763.29
Net Present vale of Project A
Particulars Amount D. Factor Present cash flow
Annual cash inflow 1-6yrs $66,000 3.58918 $236,886.19
Working capial for 6th years $135,000 0.38984 $52,628.21
Total cash inflow $289,514.40
Less working capital $135,000 1.000 $135,000
Net present value $154,514.40
b. Project B alternative should be chosen because it have positive NPV