Net Present Value
Janel Industries has $150,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:
The working capital needed for project B will be released at the end of fifth years for investment elsewhere. Janel Industries discount rate is 8%.
Required:
1. What is the present value of the salvage value of equipment in Project A?
2. Compute the net present value of Project A.
3. Compute the net present value of Project B.
4. Which investment alternative (if either) would you recommend that the company accept?
Project B Project A $150,000 so $0 Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in five years ufe of the project $150,000 $16,000 $31,000 $25,000 5 years $0 5 years Table1: Present value of $1 Periods 1% 8 OU AWNS 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 | 0.896 | 0.887 0.879 0.870 0.861 0.853 10.844 | 0.836 1 0.828 10.820 Interest rates d 3% 5% 96% 0.980 0.971 0.962 0.952 0.9430.935 0.9610.943 0.925 0.907 0.890 0.873 0.942 0.915 0.8890.864 0,840 0.816 0.924 0.888 0.855 0.823 0.792 0.763 0.906 0.8630.822 0.784 0.747 0.713 0.888 0.837 0.790 0.746 0705 0.666 0.871 0.813 0.760 0.211 0.665 0.623 0.853 0.789 0.731 0.677 0.627 0.582 0.837 0.766 0.703 0.645 0,592 0.544 0.820 0.744 0.676 0.614 0.558 0.508 0.804 0.722 0.650 0.585 0.527 0.475 0.788 0.701 0.625 0.557 0.4970 444 0.773 0.681 0.601 0.530 0.469 0.415 0.758 0.661 0.577 0.505 0.442 0.388 0.743 0642 0.555 0.481 0.417 0.362 0.7280 .623 0.534- 0.458 0.394 0.339 0.714 0.605 0.513 0.436 0.371 0.317 0.700 0.587 940.416 0.350 0.296 0.686 0.570 0.475 0.396 0.331 0.673 0.554 0.456 0.377 0.3120.258 9% 0.926 0.917 0.8570.842 0.794 0.772 0.7350.708 0.681 0.650 0.630 0.596 0.583 0.547 0.540 0.502 0.500 0.460 0.463 0.422 0.429 0.388 0.397 0.356 0.368 0.326 0.340 0.299 0.315 0.275 0.292 0.252 0.270 0.231 0.250 0.212 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.194 18 20 0.215 Table2: Present value of an annuity (Interest rate = r, Number of periods = n) nir 1% 1 0 .9901 |2 | 1.9704 3 2.9410 3.9020 5 4 .8534 5.7955 7 6 .7282 8 7 .6517 9 8 .5660 10 9 .4713 1110.3676 * 12 11.2551 13 12.1337 13.0037 15 . 13.8651 16 1 4.7179 15.5623 181 16.3983 19 1 7.2260 20 1 8.0456 2% 3% 4% 5% 6% 7% 8% 9% 10% 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 1.9416 1.9135 1.8861 1.85941.83341.8080 1.7833 1.7591 1.7355 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 4.7135 4.5797 4.4518 4.32954.2124 4.10023.9927 3.8897 3.7908 5.6014 5.4172 5.2421 5,0757 4.9173 4.7665 4.6229 4.4859 4 3553 6.4720 6.2303 6.0021 5.78645.5824 5.3893 5.2064 5.0330 4.8684 7.3255 7,01976.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 8.16227.7861 7.4353 7 1078 6.8017 6.5152 6.2469 5.9952 5.7590 8.9826 8.5302 8.1109 7.721773601 7.0236 6.7101 6.4177 6.1446 9.7868 9.2526 8.76058.3064788697.49877.13906.8052 6.4951 10.5753 9.9540 9.3851 88633 8.3838 79427 7.5361 7.1607 6.8137 11.3484 10.6350 9.9856 9.3936 8.8527 8.35777.9038 7.4869 7.1034 12.1062 11.2961 10.5631 9.8986 929508.7455 8.2442 7.7862 7.3667 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 8.06077 6061 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 14.291913.1661 12.1657 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 14 3238 15.6785 13.1339 12.0853 11.1581 10.33569.6036 8.9501 8.3649 16.3514 14.8775 13 5903 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136
