Requirement A:
Project A:
Initial Investment = $115,000
Annual Cash Inflows = $54,593
Cost of Capital = 8%
Useful Life = 3 years
NPV = -$115,000 + $54,593 * PVA of $1 (8%, 3)
NPV = -$115,000 + $54,593 * 2.5771
NPV = $25,691.62
Project B:
Initial Investment = $41,000
Annual Cash Inflows = $17,070
Cost of Capital = 8%
Useful Life = 3 years
NPV = -$41,000 + $17,070 * PVA of $1 (8%, 3)
NPV = -$41,000 + $17,070 * 2.5771
NPV = $2,991.10
So, the company should accept Project A as its NPV is higher.
Requirement B:
Project A:
Initial Investment = $115,000
Annual Cash Inflows = $54,593
Useful Life = 3 years
IRR Factor = Initial Investment / Annual Cash Inflows
IRR Factor = $115,000 / $54,593
IRR Factor = 2.1065
Using PVA of $1 table values, IRR = 20%
Project B:
Initial Investment = $41,000
Annual Cash Inflows = $17,070
Useful Life = 3 years
IRR Factor = Initial Investment / Annual Cash Inflows
IRR Factor = $41,000 / $17,070
IRR Factor = 2.4019
Using PVA of $1 table values, IRR = 12%
So, the company should accept Project A as its IRR is higher.
Dwight Donovan, the president of Perez Enterprises, is considering two investment opportunities. Because of limited resources,...
Dwight Donovan, the president of Perez 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 $115,000...
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