Respuesta :
Project B should be accepted because it makes a positive NPV and would increase the wealth of the shareholders.
What is Net present value?
According to Knight, "Net present value is the present value of the cash flows at the project's needed rate of return relative to your initial investment. It's a way to determine your return on investment, or ROI, for a project or expense, in more concrete terms.
A set of cash flows that happen at various dates are considered to have a net present value or net present worth. The amount of time between now and a cash flow determines the present value of that cash flow. The discount rate is another factor. NPV takes time value of money into account.
NPV = PV of cash inflows - PV of cash outflows
PV of cash inflow= A × (1- (1+r)^(-n)/r
A-annul cash inflow, r- discount rate-15%
NPV of project A
Net present value of project A
PV of cash inflow = 27,000× (1- 1.15^(-6)/0.15= 102,181.0327
PV of salvage value = $ 8,800 × 1.15^(-6)= 3804.482844
NPV = 102,181.0327 + 3804.482844 - 175,000= (69,014.48)
NPV = $(69,014.48)
NPV of Project B
PV of cash inflow = 44,000× (1- 1.15^(-6)/0.15= 166,517.2385
PV of working capital recouped = $175000 × 1.15^(-6)=75,657.32928
NPV = 166,517.23 + 75,657.32 - 175,000 = 67,174.56
NPV = $67,174.56
Hence, Project B should be accepted because it makes a positive NPV and would increase the wealth of the shareholders.
The complete question is,
Perit Industries has $175,000 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 $ 175,000 $ 0
Working capital investment required $ 0 $ 175,000
Annual cash inflows $ 27,000 $ 44,000
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 15%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net present value of Project A. (Enter negative values 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 values 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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