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8 December, 11:34

Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects (Ignore income taxes.) : Project A Project B Cost of equipment needed now $ 120,000 $ 70,000 Working capital investment needed now - $ 50,000 Annual net operating cash inflows $ 50,000 $ 45,000 Salvage value of equipment in 6 years $ 15,000 - Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor (s) using the tables provided. Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. The net present value of Project A is closest to: Multiple Choice

a. $82,241

b. $67,610

c. $74,450

d. $81,290

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Answers (1)
  1. 8 December, 11:46
    0
    c. $74,450

    Explanation:

    The computation of the Net present value is shown below

    = Present value of all yearly cash inflows after applying discount factor + salvage value - initial investment

    where,

    The Initial investment is $120,000

    All yearly cash flows would be

    = Annual net operating cash inflows * PVIFA for 6 years at 14%

    = $50,000 * 3.8887

    = $194,435

    Refer to the PVIFA table

    Now put these values to the above formula

    So, the value would equal to

    = $194,435 - $120,000

    = $74,435 approx
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