Question

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 $103,000 and for Project B are $48,000 The annual expected cash inflows are $34,441 for Project A and $13,316 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 b Required ARequired 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? Required A RequiredB 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 $103,000 and for Project B are $48,000. The annual expected cash inflows are $34,441 for Project A and $13,316 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 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?

Answer 1

Answer:

(a) & (b)

Net present value and internal rate of return of each project should be calculated as follows:

Cash flows	Project A	Project B
Initial cash expenditure	(103,000)	(48,000)
Annual expected cash inflow, Year 1	34,441	13,316
Annual expected cash inflow, Year 2	34,441	13,316
Annual expected cash inflow, Year 3	34,441	13,316
Annual expected cash inflow, Year 4	34,441	13,316
Annual expected cash inflow, Year 5	34,441	13,316
Net present value	34,513	5,167
Internal rate of return	20%	12%

Net present value of project A is higher than that of project B. Therefore Project A should be adopted based on net present value.

Internal rate of return of project A is higher than that of project B. Therefore Project A should be adopted based on internal rate of return.

Note :

I used this calculator to calculate NPV : https://www.calculatestuff.com/financial/npv-calculator
IRR: https://www.calculatestuff.com/financial/irr-calculator

Your can also calculate in excel using formulas of NPV, IRR