Net present value analysis of two alternatives

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Net Present Value Analysis of Two Alternatives

Over the Rainbow 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. Over the Rainbow Company uses a 20% discount rate.

Required:

Ignore income taxes. Which investment alternative (if either) would you recommend that the company accept? Show all computations using the net present value format. Prepare separate computations for each project.

Reference no: EM13955992

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