Question
Perit Industries has $170,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project
Perit Industries has $170,000 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 | $ 170,000 | $ 0 | ||
Working capital investment required | $ 0 | $ 170,000 | ||
Annual cash inflows | $ 26,000 | $ 43,000 | ||
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 14%.
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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