Question

Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects (Ignore income taxes.): Project A Project B Cost of equipment needed now $ 120,000 $ 70,000 Working capital investment needed now - $ 50,000 Annual net operating cash inflows $ 50,000 $ 45,000 Salvage value of equipment in 6 years $ 15,000 - Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. The net present value of Project A is closest to: Multiple Choice
a. $82,241
b. $67,610
c. $74,450
d. $81,290

Answer 1

Answer:

c. $74,450

Explanation:

The computation of the Net present value is shown below  

= Present value of all yearly cash inflows after applying discount factor + salvage value - initial investment  

where,  

The Initial investment is $120,000

All yearly cash flows would be

= Annual net operating cash inflows × PVIFA for 6 years at 14%  

= $50,000 × 3.8887

= $194,435

Refer to the PVIFA table

Now put these values to the above formula  

So, the value would equal to

= $194,435 - $120,000

= $74,435 approx