Exercise 13-7 Net Present Value Analysis of Two Alternatives

Special instructions: The calculations for this exercise are more easily done using an Excel spreadsheet, but that isnt required. You may also use a financial calculator with an NPV function. How ever you arrive at your answer, please post it on this document, with the method you used to compute the answers, after the requirement section below.

Perit Industries has $100,000 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		$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

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:

Compute the net present value of Project A.

Compute the net present value of Project B.

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