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 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 $116,000 and for Project B are $32,000. The annual expected cash inflows are $38,788 for Project A and $9,773 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Jordan 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 vour intermediate calculations and

Answer 1

Edwight Donovan Projecte 16000 38788 5 Project B 32000 59773 Initial Investment Net cash flow No of year costof capita F ReaA Paoject A poject B which project should be adopied Net Present value $ 38,869.24 $ 7020 - 15 Project A proje CHA Annual cash Inflow Initial Investment Net present volue $ 387 88 8 3 99271 s 154869-24 1,16,000 X 100000 (1 16000) $ 38.869.24 Table CN = 5, present value of ordinary Annuity I = 8% factor - 3 992714 project B Annual cash Infrow sa 773 X 3.99271 Initial Investment 32000* 10000 Net present value B39020.45 (32000) is 7020.75 Annuity. same table ic. present value of ordinary CN=S, IS). - 3.99271) A should be choosen as it has more NPV

Rea B Internal rate of Return projed A poject в which projed % 16 A should be adopted ? project > Inteincel rate of Rotaun factor Net Initial investment Annual cash Inflow A projeon A = 151, 16000 + 38788 2.99061 project 3 - 5 32000 & 9773 9 3.27433 Next step, Now locate this factor annuity of s I in arreus teible y present value of an In the 5 period row project As 2.99061 In the show sale 20% project B 9 3 2743 - In the shoow seite | 16%