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Lambert Manufacturing has $100,000 to invest in either Project A or Project B. The following data are available on these projects:
Project A
Project B
Cost of equipment needed now
$100,000
$60,000
Working capital investment needed now
$40,000
Annual cash operating inflows
$35,000
Salvage value of equipment in 6 years
$10,000
Both projects will 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 required rate of return is 14%. The company uses the total cost approach to evaluating alternatives.
1. The net present value of Project A is:
A) $51,000
B) $60,120
C) $55,560
D) $94,450
2. The net present value of Project B is:
A) $90,355
B) $76,115
C) $36,115
D) $54,355
The corporation also assumed a mortgage of $100,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $300,000. The transaction met the requirements to be tax-deferred under §351.
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