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:
|
A |
B |
| Cost of equipment required |
$ |
300,000 |
$ |
0 |
| Working capital investment required |
$ |
0 |
$ |
300,000 |
| Annual cash inflows |
$ |
56,000 |
$ |
48,000 |
| Salvage value of equipment in nine years |
$ |
14,000 |
$ |
0 |
| Life of the project |
|
9 years |
|
9 years |
|
|
The working capital needed for project B will be released for investment elsewhere at the end of nine years. Wriston Company uses a 10% discount rate. (Ignore income taxes.)
|
|
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
|
| a. |
Calculate net present value for each project. (Negative amounts should be indicated by a minus sign.Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)
|
|
Net Present Value |
| Project A |
$ |
| Project B |
$ |
|
| b. |
Which investment alternative (if either) would you recommend that the company accept? |
|
|
|
|