Question: Perit Industries has $125,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:
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Project A
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Project B
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Cost of equipment required
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$125,000
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$0
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Working capital investment required
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$0
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$125,000
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Annual cash inflows
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$20,000
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$64,000
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Salvage value of equipment in six years
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$8,000
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$0
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Life of the project
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6 years
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6 years
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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%.
Required:
1. Calculate net present value for each project.
2. Which investment alternative (if either) would you recommend that the company accept?
a. Project A
b. Project B
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