Which investment alternative (if either) would you recommend that the company accept? Show all computations using the net present value method. Prepare separate computations for each year.
Wriston Legacies, a retailer of fine estate jewelry, has $300,000 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 $300,000 $0
Working capital investment required $0 $300,000
Annual Cash inflows $80,000 $60,000
Salvage value of equipment in seven years $20,000 0
Life of the project 7 years 7 years
The working capital needed for project B will be released for investment elsewhere at the end of seven years. Wriston Legacies uses a 20% discount rate.
Required:
Which investment alternative (if either) would you recommend that the company accept? Show all computations using the net present value method. Prepare separate computations for each year.