2Net Present Value Analysis of Two Alternatives

Perit Industries has $100,000 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 14%.

Required:

1.Compute the net present value of Project A.

2.Compute the net present value of Project B.

3.Which investment alternative (if either) would you recommend that the company accept?

Project A Project B Cost of equipment required . . . $100,000 $0 Working capital investment required $0 $100,000 Annual cash inflows . . . . . $21,000 $16,000 Salvage value of equipment in six years . . $8,000 $0 Life of the project . . . 6 years 6 years