A manager is considering the following investment:
| Estimated capital investment | $270,000 |
| Estimated useful life | 3 years |
| Estimated disposal value in 3 years | $10,000 |
| Estimated annual savings in cash operating costs | $150,000 |
| Minimum desired rate of return | 12% |
| Present value of an ordinary annuity, 3 periods at 12% | 2.4018 |
| Present value of one, 3 periods at 12% | 0.7118 |
Assume straight-line depreciation is used. Ignore income taxes. The net present value of the investment is:
A) $50,310
B) $90,270
C) $57,428
D) $97,388
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 | $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 Company uses a 20% discount rate. (Ignore income taxes.)
Required:
a. Calculate the net present value for each project.
b. Which investment alternative (if either) would you recommend that the company accept?
