Question

Dwight Donovan, the president of Jordan 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 $112,000 and for Project B are $46,000. The annual expected cash inflows are $37,451 for Project A and $13,399 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Jordan Enterprises’ cost of capital is 6 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

1. Compute the net present value of each project. Which project should be adopted based on the net present value approach?

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

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 BΣ.

Answer 1

For Formula Please refer image 3 and 4

Net Present Value Project A Present value of Cash Outflow Cash Inflow Net Cash Flow Year Present Value Factor for 6% cash Flow -$1,12,000.00 $0.00 $0.00 $0.00 $37,451.00 $37,451.00 $37,451.00 $37,451.00 $37,451.00 -$1,12,000.00 $37,451.00 $37,451.00 $37,451.00 $37,451.00 $37,451.00 -$1,12,000.00 $35,316.29 $33,331.39 $31,458.84 $29,661.19 $27,975.90 $45,743.61 0 1 0.943 1 0.89 $0.00 0.84 $0.00 0.792 4 $0.00 0.747 5 NPV Project B Present Value Present value of Cash Outflow Cash Inflow Net Cash Flow Year Factor for 6% cash Flow -$46,000.00 $0.00 $13,399.00 $13,399.00 $13,399.00 $13,399.00 $13,399.00 -$46,000.00 $13,399.00 $13,399.00 $13,399.00 $13,399.00 $13,399.00 -$46,000.00 $12,635.26 $11,925.11 $11,255.16 $10,612.01 $10,009.05 0 1 $0.00 0.943 1 $0.00 $0.00 $0.00 $0.00 2 0.89 0.84 0.792 4 0.747 $10,436.59 NPV Net Present Value $45,743.61 $10,436.59 Project A Project B The project should be selected Project A

IRR Project A Cash Outflow Cash Inflow Net Cash Flow Year -$1,12,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 -$1,12,000.00 $37,451.00 $37,451.00 $37,451.00 $37,451.00 $37,451.00 0 $37,451.00 $37,451.00 $37,451.00 $37,451.00 $37,451.00 1 2 5 20.00% IRR Project B Cash Outflow Cash Inflow Net Cash Flow Year -$46,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $13,399.00 $13,399.00 $13,399.00 $13,399.00 $13,399.00 -$46,000.00 $13,399.00 $13,399.00 $13,399.00 $13,399.00 $13,399.00 1 4 5 14.00% IRR IRR Project A Project B The project should be selected 20.00% 14.00% Project A N m n

Net Present Value Project A Cash Outflow Cash Inflow Net Cash Flow Year Present Value Present value of Factor for 6% cash Flow -112000 -B5+C5 E5 D5 1 1 37451 3В6+C6 0.943 -E6* D6 37451 -B7+C7 0.89 -E7*D7 3 37451 -B8+C8 0.84 E8*D8 4 37451 B9+C9 0.792 -E9* D9 0 37451 B10+C10 0,747 -E10* D10 SUM(F5:F10) NPV Project B Present value of Cash Outflow Cash Inflow Net Cash Flow Year Present Value Factor for 6% cash Flow -46000 -B17+C17 E17*D17 E18 D18 0 13399 -B18+C18 0.943 13399 B19+C19 0.89 E19*D19 -E20 D20 3 0.84 13399 B20+C20 13399 B21+C21 0.792 -E21*D21 -E22 D22 0 13399 -B22+C22 0.747 SUM(F17:F22) NPV Net Present Value Project A Project B The project should be selected =F11 =F23 Project A O O O O O H N m un

IRR Project A Cash Outflow Cash Inflow Net Cash Flow Year -112000 0 B51+C51 37451 B52+C52 37451 B53+C53 37451 B54+C54 37451 -B55+C55 37451 -B56+ C56 =IRR(D51:D56) IRR Project B Cash Outflow Cash Inflow Net Cash Flow Year 0 -46000 0 -B62+C62 13399 -B63+C63 13399 B64+C64 0 13399 -B65+C65 13399 -B66+C66 13399 -B67+C67 IRR(D62:D67) IRR IRR Project A Project B The project should be selected D57 D68 Project A O O O O O O N m un O N m n