Question

Dwight Donovan, the president of Rooney 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 four 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 $107,000 and for Project B are $39,000. The annual expected cash inflows are $41,333 for Project A and $12,840 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Rooney 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 answer to the nearest whole dollar) Net Present Value Project A Project B Which project should be adopted? <Required A Required B

Answer 1

Project A:

Present value of cash inflows = Annual cash inflows x PVIFA_8%,4

= $41333 x 3.465106 = $143223

Present value of cash outflows = Initial investment = $107000

Net present value = 143223 - 107000 = 36223

Project B:

Present value of cash inflows = Annual cash inflows x PVIFA_8%,4

= $12840  x 3.465106 = 44492

Present value of cash outflows = Initial investment = $39000

Net present value = 44492 - 39000 = $5492

Project A should be accepted.

IRR

Project A = 20%

Project B = 12%