Question

Dwight Donovan, the president of Jordan 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 $117,000 and for Project B are $36,000. The annual expected cash inflows are $46,221 for Project A and $14,989 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Jordan Enterprises' cost of capital is 6 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

Answer 1

required A B8 C D F G Н I 1 Project B Project A 2 present present value present value factor present value year cash flow cash flow factor@ 6% value @6% 1.000000-$36,000.00 2.673012 $40,065.78 -$117,000 -$117,000.00 -$ 36,000 1,000000 0 $46,221 $123,549.29 $14,989 5 1--3 2.673012 $6,549.29 $4,065.78 6 7 net present required A value $ 6,549.29 Project A $4,065.78 Project B 10 which project should be adopted? Project A 11 reason -because Project A has higher net present value 12 13 internal rate of required B 14 return 9.00% Project A 15 12.00% Project B 16 which project should be Project B adopted? 17 reason -because Project B has higher internal rate of return 18 19 .. st LO LON

for formulas and calculations, refer to the image below -

fix required A В8 В A C D F G Н I 1 Project A Project B 2 cash flow present value factor@ 6% year cash flow present value factor@ 6% present value present value 3 0 1 -117000 -36000 1 =D4*E4 -G4*H4 -ROUND (G5*H5,2) -SUM(14:15) 4 =ROUND(-PV(6%,3,1),6) =ROUND(D5*E5,2) -SUM(F4:F5) =ROUND(-PV(6%,3,1),6) 1--3 46221 14989 5 6 7 required A net present value 8 Project A =F6 9 E16 Project B 10 which project should be adopted? |ЕC9 11 reason -because Project A has higher net present value 12 13 required B internal rate of return 14 =RATE (3,D5,D4) |=RATE(3,G5,G4) Project A 15 Project B 16 which project should be adopted? |ЕC16 17 reason -because Project B has higher internal rate of return 18 19

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