Question

Dwight Donovan, the president of Zachary 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 $112,000 and for Project B are $38,000. The annual expected cash inflows are $34,571 for Project A and $12,511 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Zachary Enterprises’ cost of capital is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required Compute the net present value of each project. Which project should be adopted based on the net present value approach? 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 answers to 2 decimal places.)

	Net Present Value Project A Project B Which project should be adopted?

• Required A
• Required B

Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?

	Internal Rate of Return Project A % Project B % Which project should be adopted?

Answer 1

Project A NPV :

CFO = $ 112,000

CF1 = $ 34,571

CF2 = $ 34,571

CF3 = $34,571

CF4= $34,571

So, at 8% discount rate the NPV is

= $2,503.35

Similarly for project B NPV is,

CF0 = $ 38,000

CF1 = $12,511 to CF4 = $12,511

At 8% discount rate , NPV is

= $3,438.02 ( rounded off to two decimal places )

On the basis of NPV, project B should be accepted due to the higher NPV.

The IRR of project A is : IRR is the rate at which the NPV is zero ,

( $112,000) + 34571/( 1 + IRR) ^1 + 34571/( 1 + IRR) ^2 + 34571/( 1 + IRR)^3 + 34571/(1+IRR)^4 = 0

= 9 %

Similarly, the IRR of project B is 12%.

On the basis of IRR is 12% due to the higher IRR.