Question

LO 16-2, 16-3 Dwight Donovan, the president of Franklin 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 $114,000 and for Project B are $30,000. The annual expected cash inflows are $45,036 for Project A and $12,922 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Franklin 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 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 B

Answer 1

Calculation Of Net Present Value DOO Annual Cash Flow PVA Factor 6%, For 3 years PV Of Annual Cash Flow (a*b) Initial Cost Of Project NPV (c-d) Project A Project B 45036 12922 2.67301 2.67301 120381.77 34540.66 114000 30000 6381.77 4540.66 Project A gives greater NPV hence Project A should be selected.

Calculation Of IRR Let Us Calculate NPV using 15% rate Project A Project B oud Annual Cash Flow PVA Factor 6%, For 3 years PV Of Annual Cash Flow (a*b) Initial Cost Of Project 45036 12922 2.28323 2.28323 102827.33 29503.83 114000 30000 NPV (C-d) -11172.67 -496.17 Now let us calutae IRR by Interpolation between 6% to 10% rate

Project A =6% +(6381.77/6381.77+11172.67)*9 =6+3 =9% Project B =6% +(4540.66/4540.66+496.17)*9 =6+8 =14% Project B should be accepted.