Question
Tri-Facet Company is considering whether to invest $99,000 in Project A or Project B. The following information is available for both projects: Project A Project
Tri-Facet Company is considering whether to invest $99,000 in Project A or Project B. The following information is available for both projects:
| Project A | Project B |
Cost of equipment needed today |
$99,000 |
|
Working capital requirement |
| $99,000 |
Annual cash operating inflows | $27,000 | $18,000 |
Salvage value in 4 years | $9,000 |
|
Tri-Facet Company requires a rate of return of 12% on its capital projects.
Both projects will last 4 years. If Tri-Facet Company selects Project B, the working capital investment will be released at the end of the 4-year period.
Required:
- Calculate the net present value of each project. (6 marks)
- Which project would you pick based on your net present value calculations? (2 marks)
- Calculate the profitability index for Projects A and B. (2 marks)
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