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; coefficient of correlation;