Question

Seved Dwight Donovan, the president of Campbell Enterprises, is considering two investrhent 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 fectory 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 $110000 and for Project B are $38,000. The annual expected cash inflows are $33.954 for Project A and $12,511 for Project B. Both investmehts are expected to provide cash flow benefits for the next four years. Campbell Enterprises' cost of capital is 8 percent. (PV of $1 and PVA of $1) (Use opproprlate fector(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? REUne yourintereediate calculations and final answers to 2 decimal places) Net Present Value Project A Project B Mnich rit beadoptec Required B

Answer 1

Calculation of NPV:

1) Calculation of Net Present Value (NPV) of Project A:

Year	Particulars	Discounting Factor @ 8%	Cash Flow	Net Present Value
0	Initial Investment	1	(110000)	(110000)
1-4	Annual cash saving	3.312127 (Cumulative)	33954	112459.96
	Net Present Value			2459.96

2) Calculation of Net Present Value (NPV) of Project B:

Year	Particulars	Discounting Factor @ 8%	Cash Flow	Net Present Value
0	Initial Investment	1	(38000)	(38000)
1-4	Annual cash saving	3.312127 (Cumulative)	12511	41438.02
	Net Present Value			3438.02

Based on Net Present Value (NPV) of both the projects, Project B gives higher NPV. Hence, Project B shall be selected.

Calculation of Internal Rate of Return (IRR)

1) NPV of Project A @ 10% rate of interest

Year	Particulars	Discounting Factor @ 10%	Cash Flow	Net Present Value
0	Initial Investment	1	(110000)	(110000)
1-4	Annual cash saving	3.169865 (Cumulative)	33954	107629.60
	Net Present Value			-2370.40

2) Calculation of Net Present Value of Project B @ 12%

Year	Particulars	Discounting Factor @ 10%	Cash Flow	Net Present Value
0	Initial Investment	1	(38000)	(38000)
1-4	Annual cash saving	3.037349 (Cumulative)	12511	38000.27
	Net Present Value			00

IRR is the rate where NPV of the project is zero:

Now for calculating IRR of project A formula:

Starting Rate + [NPV at starting rate/(NPV at starting rate + NPV at ending rate) * (Ending rate- Starting Rate)]

putting the values

8 + [ 2459.96/ (2459.96+2370.40) * (10 - 8)]

= 8 + 1.01854

= 9.01854

Therefore, IRR of Project A is 9.01854%.

IRR of Project B is 12.00%

Hence, based on IRR Project B shall be selected, as project B gives a higher internal rate of return (IRR).

Conclusion in Table format

Particulars	NPV @ 8%
Project A	2459.96
Project B	3438.0

Particulars	IRR (%)
Project A	9.01854
Project B	12.00%