Question
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
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%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net present value of Project A. (Enter negative values with a minus sign.)
2. Compute the net present value of Project B. (Enter negative values with a minus sign.)
3. Which investment alternative (if either) would you recommend that the company accept?
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Cost Accounting
Authors: Les Heitger, Pekin Ogan, Serge Matulich
2nd Edition
053881764X, 978-0538817646
