Project A Project B Cost of equipment required Working capital investment required Annual cash inflows..... Salvage value of equipment in six years Life of the project ..... $100,000 $0 $0 $100,000 $16,000 $21,000 $8,000 6 years $0 6 years

Project A Project B Cost of equipment required Working capital investment required Annual cash inflows..... Salvage value of equipment in six years Life of the project ..... $100,000 $0 $0 $100,000 $16,000 $21,000 $8,000 6 years $0 6 years

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 5BE

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Question

Net Present Value Analysis of Two Alternatives

Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

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%.

Required:

1. Compute the net present value of Project A.

2. Compute the net present value of Project B.

3. Which investment alternative (if either) would you recommend that the company accept?

Project A
Project B
Cost of equipment required
Working capital investment required
Annual cash inflows.....
Salvage value of equipment in six years
Life of the project .....
$100,000
$0
$0 $100,000
$16,000
$21,000
$8,000
6 years
$0
6 years

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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