Question - Wriston Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:
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A
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B
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Cost of equipment required
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$300,000
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$0
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Working capital investment required
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$0
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$300,000
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Annual cash inflows
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$80,000
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$60,000
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Salvage value of equipment in seven years
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$20,000
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$0
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Life of the project
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7 years
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7 years
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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:
a. Calculate net present value for each project.
b. Which investments alternatives (if either) would you recommend that the company accept?