Question

Dwight Donovan, the president of Vernon Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of three years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $109,000 and for Project Bare $40,000. The annual expected cash inflows are $51,745 for Project A and $17,229 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Vernon Enterprises' cost of capital is 6 percent. (PV of $1 and PVA of SD (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach? Complete this question by entering your answers in the tabs below. Required A Required Compute the net present value of each project. Which project should be adopted based on the net present value approach? (Round your intermediate calculations and final answer to the nearest whole dollar) Net Present Value Project A Proiect Which peduld be adopted? Required >

Answer 1

Answer:

Calculation of Net Present Value of both projects:

Project A
Particulars	Amount
Projected Cash inflows(a)	51,745
Discounting Factor(b)	6%
No of years(c)	3
PV Annuity Factor(d)	2.6730
PV of Cash Inflows {e=(a*d)}	138,314.39
Cash Outflow (f)	109,000
NPV (e-f)	29,314.39

Project B
Particulars	Amount
Projected Cash inflows(a)	17,229
Discounting Factor(b)	6%
No of years(c)	3
PV Annuity Factor(d)	2.6730
PV of Cash Inflows {e=(a*d)}	46,053.12
Cash Outflow (f)	40,000
NPV (e-f)	6,053.12

Conclusion: Since NPV in Project A is higher Project A should be chosen.

2.)

IRR
	Project A	Project B
Cash inflows	51,745	17,229
Annuity PVF at 20% for 3 years	2.1065
Annuity PVf at 14% fr 3 yrs		2.3216
Present value of inflows	109,000.84	39,998.85
Less: Investment	109,000	40,000
NPV	-0.84	-1.15
IRR	20%	14%

Conclusion: Based on IRR, Project A should be chosen because it has higher IRR.