Perit Industries has $135,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

Continuation of the question

                                                                    Project A   Project B

Cost of equipment required                      $135,000   $0    

Working capital investment required       $0               $135,000    

Annual cash inflows                                   $22,000    $66,000    

Salvage value of equipment in six years $8,400        $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 17%.

Required:

a. Calculate net present value for each project.

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

Note: The discount factor use are derived from Exhibit 11B-1 and Exhibit 11B-2

a.                  Net Present vale of Project A

Particulars                             Amount   D. Factor    Present cash flow

Annual cash inflow 1-6yrs    $22,000   3.58918       $78,962.06

Salvage value for 6th years $8,400      0.38984     $3,274.64

Total cash inflows                                                       $82,236.71

Less: Initial investment         $135,000  1.000           $135,000

Net present value                                                      -$52,763.29

                 Net Present vale of Project A

Particulars                             Amount   D. Factor    Present cash flow

Annual cash inflow 1-6yrs     $66,000   3.58918       $236,886.19

Working capial for 6th years $135,000 0.38984      $52,628.21

Total cash inflow                                                          $289,514.40

Less working capital              $135,000  1.000           $135,000

Net present value                                                        $154,514.40

b. Project B alternative should be chosen because it have positive NPV

answer; /// the best answer to the above question is; the main economic goal that a society consider when deciding the best way to distribute its wealth is equity, this to ensure that all resources are equally distributed; ///(a) (economic equity)

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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