Answer:
npv = $92,531.34
NPV = -$13,206.90
Project A should be chosen because it has a higher NPV
Explanation:
Here is the full question :
Perit Industries has $210,000 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 $210,000 $0 Working capital investment required $0 $210,000 Annual cash inflows $30,000 $52,000 Salvage value of equipment in six years $9,100 $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 11B-1 and Exhibit 11B-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. Use the appropriate table to determine the discount factor(s).) b. Which investment alternative (if either) would you recommend that the company accept? Project B Project A
Net present value is the present value of after-tax cash flows from an investment less the amount invested.
NPV can be calculated using a financial calculator
Project A
Cash flow in year 0 = $-210,000
Cash flow each year from year 1 to 5 = $30,000
Cash flow in year 6 = $30,000 + $9100 = $39,100
I = 15%
npv = $92,531.34
Project B
Cash flow in year 0 = $-210,000
Cash flow each year from year 1 to 6 = $52,000
I = 15%
NPV = -$13,206.90
Project A should be chosen because it has a higher NPV
