Question

Pedro Spier, the president of Spler 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 $104,000 and for Project B are $45,000. The annual expected cash inflows are $41,086 for Project A and $18,095 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Spier Enterprises' cost of capital is 6 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a-1. Compute the net present value of each project. (Round your intermediate calculations and final answers to 2 decimal places.) Net Present Value ces Project A Project B 3-2. Which project should be adopted based on the net present value approach? Project A Project B b-1. Compute the approximate Internal rate of return of each project. Internal Rate of Return Project A Project B

Answer 1

a1. Net Present Value = Present value of annual saving - initial investment

NPV of Project A = 41086*Cumulative PVF @6%, 3 years - 104000

= $41086*2.673 - 104000 = $5822.88

NPV of Project B = 18095*Cumulative PVF @6%, 3 years - 45000

= $18095*2.673 - 45000 = $3367.94

a2. Project A.

b1.. IRR = Initial Investment / Annual cash inflow = Found the value in the Cumulative present value factor in the relevant year

Project A = 104000 / 41086 = 2.531 = 9%

Project B = 45000 / 18095 = 2.487 = 10%