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Brazen, Ltd. has $75,000 to invest. The company is trying to decide between two different projects.  The...

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Accounting

Brazen, Ltd. has $75,000 to invest. The company is trying todecide between two different projects.  The alternativesare:

Project A Project B

Cost of equipment required$ 75,000$ -
Working capital investment required$ -$ 75,000
Annual cash inflows$ 18,000$ 11,000
Salvage value of equipment in six years$ 22,000$ -
Life of the project6 years6 years

The working capital needed for project B will be released at theend of six years for investment elsewhere. Brazen’s discount rateis 12%.

Required:

Which project (if either) would you recommend that the companypursue? Show all calculations in excel using the net present valueformat. Must show a schedule that reflects each of the six years(as modeled in class and outlined in the PowerPoint presentation).Prepare separate calculations for each project.

Answer & Explanation Solved by verified expert
4.0 Ratings (771 Votes)

ANSWER :

Project A :

Computation of net operating cash flow :

Year-0 Year-1 Year-2 Year-3 Year-4 Year-5 Year-6
A Initial cash outflow -75,000 18,000     18,000     18,000     18,000
B Operating cash flow 18,000 18,000
C salvage value 22000
D Net cash flow (A+B+C) (75,000) 18,000 18,000 18,000     18,000     18,000     40,000
E PVIF 12% 1 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066
F Present value (E*D) -75,000 16,071 14,349 12,812 11,439 10,214 20,265 10,151
NPV = $10,151.22

Project B :

Computation of net operating cash flow

Year-0 Year-1 Year-2 Year-3 Year-4 Year-5 Year-6
A Working capital -75,000
B Operating cash flow 11,000           11,000           11,000     11,000     11,000     11,000
C working capital release 75000
D Net cash flow (A+B+C      (75,000)            11,000           11,000           11,000     11,000     11,000     86,000
E PVIF @ 12% 1            0.8929          0.7972          0.7118     0.6355     0.5674     0.5066
F Present value (E*D) -75,000 9,821 8,769 7,830 6,991 6,242 43,570 8,223
NPV = $8,222.81

Since NPV of B is lower compared to NPV of A . Therefore A should be selected.
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