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

Perit Industries has $135,000 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	$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%.

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.

	Project A	Project B
Net present value

b.

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

	Project B
	Project A