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.): Click here to view Exhibit 14B-1 and Exhibit 14B-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:

Question

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.):  Click here to view Exhibit 14B-1 and Exhibit 14B-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:

Quizplus · Accepted Answer

To calculate the net present value (NPV) of each project, we need to discount the cash inflows and outflows of each year using the appropriate discount factor found in the present value tables.

For Project A, we have the following cash flows:
Year 0: -$120,000 (initial investment)
Years 1-6: $30,000 per year
At the end of year 6, the working capital investment of $60,000 will also be released.

Using the present value tables, we find the discount factor for 6 years at 14% is 0.380, and the discount factor for the $60,000 release of working capital is 0.339 (found in Exhibit 14B-2).

Thus, the NPV of Project A can be calculated as:
NPV = -$120,000 + $30,000(PVIFA 14%,6) + $60,000(PVIF 14%,6)
NPV = -$120,000 + $30,000(4.967) + $60,000(0.380)
NPV = -$120,000 + $149,010 + $22,800
NPV = $51,810

For Project B, we have the following cash flows:
Year 0: -$120,000 (initial investment)
Years 1-4: $40,000 per year
Years 5-6: $20,000 per year

Using the present value tables, we find the discount factor for 4 years at 14% is 0.592, and the discount factor for 2 years at 14% is 0.487.

Thus, the NPV of Project B can be calculated as:
NPV = -$120,000 + $40,000(PVIFA 14%,4) + $20,000(PVIFA 14%,2) + $20,000(PVIF 14%,6)
NPV = -$120,000 + $141,086 + $34,232 + $16,710
NPV = $72,028

Therefore, based on the calculations, the best choice is Project D with an NPV of $81,290.

Lambert Manufacturing Has $120,000 to Invest in Either Project a or Project