(320,000 - 36,000) / 10 = 28,400 to A's cash flows
otherwise...
use Present Value ordinary annuity "PVoa" to value the base annual cash flows...(PV of the annual cash flows) =
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
A) using just the base $89k...(change to 117,400 if depreciation has not been accounted for, as I first mentioned)
PVoa = 89k[(1 - (1 / 1.18^10)) / 0.10]
= 89k[(1 - 0.19106) / 0.10]
= 89k[8.08936]
= 89k[8.089]
= $719,921.00
Add...
PV of the salvage value recaptured in year 10...
= 36,000 / 1.18^10
= 36,000 / 5.234
= 6,878
NPV = (320,000) + 719,921 + 6878 = 406,799
B) PV of the cash flows:
=82k[8.089]
= 663,298
add...
PV of the Net Working Capital recovered in year 10...
320,000 / 5.234
= 61,139
NPV = (320k) + 663,298 + 61,139
= 404,437
The NPV of project A is slightly larger than that of project B so you would recommend A. FYI adding the depreciation to A's cash flows (if not already included) only increases A's NPVs, making it an even better option than B.
Wriston Company has $320,000 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 $320,000 $0
Working capital investment required $0 $320,000
Annual cash inflows $89,000 $82,000
Salvage value of equipment in ten years $36,000 $0
Life of the project 10 years 10 years
The working capital needed for project B will be released for investment elsewhere at the end of ten years. Wriston Company uses a 18% discount rate. (Ignore income taxes.)
Required:
a.
Calculate net present value for each project. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.Omit the "$" sign in your response.)
Net Present Value
Project A $
Project B $
b. Which investment alternative (if either) would you recommend that the company accept?
Project A
Project B
