Exercise 7-7 (Algo) Net Present Value Analysis of Two Alternatives [LO7-2]

Perit Industries has $210,000 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	$ 210,000		$ 0
Working capital investment required	$ 0		$ 210,000
Annual cash inflows	$ 30,000		$ 52,000
Salvage value of equipment in six years	$ 9,100		$ 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 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.

Required:

Compute the net present value of Project A.

Note: Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.

Compute the net present value of Project B.

Note: Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.

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