Question

Dwight Donovan, the president of Perez 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 $107,000 and for Project B are $34,000. The annual expected cash inflows are $42,271 for Project A and $15,139 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Perez Enterprises' cost of capital is 8 percent. (PV of $1 and PVA of $1) (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 B 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 answers to 2 decimal places.) Net Present Value Project A Project B Which project should be adopted? < Required A Required B >

Answer 1

NPV = Present value of cash inflows - present value of cash outflows
Project A	42271*PVAF(8%, 3 years) - 107000	1936.467287
Project B	15139*PVAF(8%, 3 years) - 34000	5014.671483
Project B since NPV is higher

IRR is the rate at which NPV = 0			IRR
PVAF	Project A	2.531286225	9%
	Project B	2.245855076	16%
Project B should be selected