Question
Perit Industries has $175,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project
Perit Industries has $175,000 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 | $ | 175,000 | $ | 0 |
| Working capital investment required | $ | 0 | $ | 175,000 |
| Annual cash inflows | $ | 27,000 | $ | 44,000 |
| Salvage value of equipment in six years | $ | 8,800 | $ | 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:
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?
Perit Industries has $175,000 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 | $ | 175,000 | $ | 0 |
| Working capital investment required | $ | 0 | $ | 175,000 |
| Annual cash inflows | $ | 27,000 | $ | 44,000 |
| Salvage value of equipment in six years | $ | 8,800 | $ | 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:
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?
$ Net present value project A
Net present value project B$ 67,153. (This answer is correct)
Which investment alternative (if either) would you recommend that the company accept? Project B (This answer is correct)
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Fundamental financial accounting concepts
Authors: Thomas P. Edmonds, Frances M. Mcnair, Philip R. Olds, Edward
8th edition
978-007802536, 9780077648831, 0078025362, 77648838, 978-0078025365
