Question: Exercise 12-7 Net Present Value Analysis of Two Alternatives [LO12-2] Perit Industries has $120,000 to invest. The company is trying to decide between two alternative
Exercise 12-7 Net Present Value Analysis of Two Alternatives [LO12-2] Perit Industries has $120,000 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 $ 120,000 $ 0 Working capital investment required $ 0 $ 120,000 Annual cash inflows $ 22,000 $ 70,000 Salvage value of equipment in six years $ 8,800 $ 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 14%. 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?
Exercise 12-7 Net Present Value Analysis of Two Alternatives [LO12-2]
Perit Industries has $120,000 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 | $ | 120,000 | $ | 0 |
| Working capital investment required | $ | 0 | $ | 120,000 |
| Annual cash inflows | $ | 22,000 | $ | 70,000 |
| Salvage value of equipment in six years | $ | 8,800 | $ | 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 14%.
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?
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