Exercise 11-5 Net Present Value Analysis of Two Alternatives [LO11-2]

Perit Industries has $140,000 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	$140,000	$0
Working capital investment required	$0	$140,000
Annual cash inflows	$23,000	$35,000
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 15%.

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Required:

a.	Calculate net present value for each project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)

b.

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

	Project A
	Project B