Question: Exercise 12-7 (Algo) Net Present Value Analysis of Two Alternatives [LO12-2] Perit Industries has $135,000 to invest. The company is trying to decide between two
Exercise 12-7 (Algo) Net Present Value Analysis of Two Alternatives [LO12-2]
Perit Industries has $135,000 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 | $ 135,000 | $ 0 | ||
| Working capital investment required | $ 0 | $ 135,000 | ||
| Annual cash inflows | $ 22,000 | $ 66,000 | ||
| Salvage value of equipment in six years | $ 8,400 | $ 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 17%.
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 values 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 values 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?
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