Exercise 12-7 Net Present Value Analysis of Two Alternatives [LO12-2]

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	$	67,000
Salvage value of equipment in six years	$	8,500	$	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 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net present value of Project A. (Enter negative value with a minus sign. Round your final answer to the nearest whole dollar amount.)

2. Compute the net present value of Project B. (Enter negative value with a minus sign. Round your final answer to the nearest whole dollar amount.)

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

1. Net present value project A
2. Net present value project B
3. Which investment alternative would you recommend that the company accept?