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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.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91625976

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