Question

Dwight Donovan, the president of Munoz 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 five 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 $114,000 and for Project B are $44,000. The annual expected cash inflows are $29,309 for Project A and $12,206 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Munoz Enterprises’ cost of capital is 6 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

1. Compute the net present value of each project. Which project should be adopted based on the net present value approach?

2. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?

Net Present Value Project A Project B Which project should be adopted?

Answer 1

	Ner Present Value
Project A	$9,378
Project B	$7,387
Which Project should be adopted	Project A

PV Factor (6%) Project A 1.00 -1,14,000 0.94 29,306 0.89 29,306 0.84 29,306 0.79 29,306 0.75 29,306 Net Present Value Internal Rate of Return Present Value of A C = (A*B) -1,14,000 27,548 26,082 24,617 23,152 21,980 9,378 3% Project B D -44,000 12,206 12,206 12.206 12,206 12,206 Present Value of B E = A*D) -44,000 11,474 10,863 10,253 9,643 9,155 7,387 6% O REDMI NOTE 5 PRO MIDUAL CAMERA 2020/2/12 20:25

Reason:- Excess NPV of project should be adopted.

	Internal Rate of Return	%
Project A	3	%
Project B	6	%
Which Project should be adopted	Project B

Reason:- If IRR of a project is greter than or equal to cost of capital than project should be accpted.