Question: Wriston Company has $300,000 to invest. The company is trying to decide two alternative uses of the funds. The alternatives are as follows:
A B
Cost of equipment required $300,000 $0
Working capital investment required $0 $300,000
Annual cash inflows $80,000 $60,000
Salvage value of equipment in 7 years $20,000 $0
Life of project 7 years 7 years
The working capital needed for project B will be released for investment elsewhere at the end of seven years. Wriston Company uses a 20% discount rate.
REQUIRED:
(Ignore income taxes.) Which investment alternative (if either) would you recommend that the company accept? Show all computations using the net present value format. Prepare separate computations for each project.