Perit Industries has $190,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternat
ives are: Project A Project B Cost of equipment required $ 190,000 $ 0 Working capital investment required $ 0 $ 190,000 Annual cash inflows $ 28,000 $ 48,000 Salvage value of equipment in six years $ 8,900 $ 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 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net present value of Project A. (Enter negative value with a minus sign. Round your final answer to the nearest whole dollar amount.)
2. Compute the net present value of Project B. (Enter negative value with a minus sign. Round your final answer to the nearest whole dollar amount.)
3. Which investment alternative (if either) would you recommend that the company accept?
Required:
1. Compute the net present value of Project A. (Enter negative value with a minus sign. Round your final answer to the nearest whole dollar amount.)
2. Compute the net present value of Project B. (Enter negative value with a minus sign. Round your final answer to the nearest whole dollar amount.)
3. Which investment alternative (if either) would you recommend that the company accept?
1 answer:
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Answer:
24.7215
Explanation:
Given;
Discount = 50%
Regular price, p = $8
cost of cake, c = $5
salvage value, s = 50% of $8 = $4
Mean = 20
Standard deviation, σ = 7
Now,
Underage cost, Cu = p - c
= $8 - $5
= $3
Overage cost, Co = c - s
= $5 - $4
= $1
P ≤
P ≤
P ≤ 0.75
The Z value for the probability 0.75 is 0.6745
The optimal stocking level = Mean + ( z × σ )
= 20 + 0.6745 × 7
= 24.7215