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Wriston Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows: $300,000
Wriston Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows: $300,000 $300,000 Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in seven years Life of the project $60,000 $0 $80,000 $20,000 7 years $0 7 years The working capital needed for project B will be released for investment elsewhere at the end of seven years. Wriston Company uses a 20% discount rate. (Ignore income taxes.) Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables. Required: a. Calculate net present value for each project. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.) Year(s) 2007 Item Amount of Cash Flows Present Value of Cash Flows Now Project A: Cost of the equipment Annual cash inflows Salvage value of the equipment Net present value 1-7 Project B: Working capital investment Now 1-7 Annual cash inflows Working capital released Net present value b. Which investment alternative (if either would you recommend that the company accept? O Project B Project A
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