Exercise 11 8 Net Present Value Analysis of Two Alternatives [LO1]
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Wriston Company has $400,000 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 | $ | 400,000 | $ | 0 |
| Working capital investment required | $ | 0 | $ | 400,000 |
| Annual cash inflows | $ | 76,000 | $ | 65,000 |
| Salvage value of equipment in five years | $ | 18,000 | $ | 0 |
| Life of the project | 5 years | 5 years | ||
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The working capital needed for project B will be released for investment elsewhere at the end of five years. Wriston Company uses a 10% discount rate. (Ignore income taxes.) |
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Click here to view Exhibit 11B 1 andExhibit 11B 2, to determine the appropriate discount factor(s) using tables. |
| 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, other intermediate calculations and final answers to the nearest whole dollar.) |
| Net Present Value | |
| Project A | $ |
| Project B | $ |
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| b. | Which investment alternative (if either) would you recommend that the company accept? | ||||
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