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Perit Industries has $120,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project

Perit Industries has $120,000 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 $120,000 $0
Working capital investment required $0 $120,000
Annual cash inflows $21,000 $30,000
Salvage value of equipment in six years $8,200 $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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:
a.

Calculate net present value for each project

Perit Industries has $120,000 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 $120,000 $0
Working capital investment required $0 $120,000
Annual cash inflows $21,000 $30,000
Salvage value of equipment in six years $8,200 $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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:
a.

Calculate net present value for each project

Project A Project B
Net present value

b. Which investment alternative (if either) would you recommend that the company accept?
Project B
Project A

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