Question
Perit Industries has $115,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project
Perit Industries has $115,000 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 | $ | 115,000 | $ | 0 |
Working capital investment required | $ | 0 | $ | 115,000 |
Annual cash inflows | $ | 21,000 | $ | 69,000 |
Salvage value of equipment in six years | $ | 8,700 | $ | 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 14B-1 and Exhibit 14B-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. Round your final answer to the nearest whole dollar amount.)
2. Compute the net present value of Project B. (Enter negative values 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?
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Management And Cost Accounting
Authors: Alnoor Bhimani, Srikant M. Datar, Charles T. Horngren, Madhav V. Rajan
7th Edition
1292232668, 978-1292232669
