Question

Dwight Donovan, the president of Donovan 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 $400,000 and for Project B are $160,000. The annual expected cash inflows are $126,000 for Project A and $52,800 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Donovan Enterprises' desired rate of return 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 your final answers to 2 decimal places.) Net Present Value Project A Project B Which project should be adopted? Required B Required A

Answer 1

Requirement A Calculation of NPV ID OOO Annual Cash Flow PVA Factor 8%, 4 year Present Value of Cash Flow (a*b) Initial Investment Net Present Value (C-d) Project A Project B 126000 52800 3.31213 3.31213 417327.98 174880.30 400000 160000 17327.98 14880.30 Project A will be selected. Requirement B Calculation Of IRR Project A Project B IRR Using Excel Function 9.93% 12.11% Since Project B has greater IRR project B will selected.