Question
Wriston Company has $200,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows: A
Wriston Company has $200,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows: |
A | B | |||
Cost of equipment required | $ | 200,000 | $ | 0 |
Working capital investment required | $ | 0 | $ | 200,000 |
Annual cash inflows | $ | 74,000 | $ | 64,000 |
Salvage value of equipment in eleven years | $ | 36,000 | $ | 0 |
Life of the project | 11 years | 11 years | ||
The working capital needed for project B will be released for investment elsewhere at the end of eleven years. Wriston Company uses a 14% discount rate. (Ignore income taxes.) |
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. |
Required: |
a. | Calculate net present value for each project. (Negative amounts should be indicated by a minus sign.Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.) |
Net Present Value | |
Project A | $ |
Project B | $ |
b. | Which investment alternative (if either) would you recommend that the company accept? | ||||
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