Question

Check my work Problem 16-19 Using net present value and internal rate of return to evaluate investment opportunities 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 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 $31,000. The annual expected cash inflows are $38,788 for Project A and $8,178 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Franklin 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

Answer 1

		Net Present Value
Project A	=	$   38,869.24
Project B	=	$     1,652.38
Which project should be accepted	=	Project A
		IRR
Project A	=	20%
Project B	=	10%
Which project should be accepted	=	Project A
WorkingsL
Project A:
	Year	Value Flows	Present Factor @ 8%	Present Value
Initial Cost	0	$   -1,16,000	1	$       -1,16,000
Cash Inflows	1 - 5	$         38,788	3.99271	$         1,54,869
Net Present Value				$      38,869.24
	Year	Value Flows
	0	$   -1,16,000
	1	$         38,788
	2	$         38,788
	3	$         38,788
	4	$         38,788
	5	$         38,788
IRR	=	20%
Project B:
	Year	Value Flows	Present Factor @ 8%	Present Value
Initial Cost	0	$       -31,000	1	$           -31,000
Cash Inflows	1 - 5	$           8,178	3.99271	$            32,652
Net Present Value				$         1,652.38
	Year	Value Flows
	0	$       -31,000
	1	$           8,178
	2	$           8,178
	3	$           8,178
	4	$           8,178
	5	$           8,178
IRR	=	10%