Question

3

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 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 $117.000 and for Project B are $36,000. The annual expected cash inflows are $46,221 for Project A and $14,989 for Proiect B. Both investments are expected to provide cash flow benefits for the next three 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 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.)

Answer 1

Solution a:

Computation of NPV
			Project A		Project B
Particulars	Period	PV Factor (6%)	Amount	Present Value	Amount	Present Value
Cash outflows:
Initial investment	0	1	$117,000	$117,000.00	$36,000	$36,000.00
Present Value of Cash outflows (A)				$117,000.00		$36,000.00
Cash Inflows
Annual cash inflows	1-3	2.67301	$46,221	$123,549.20	$14,989	$40,065.75
Present Value of Cash Inflows (B)				$123,549.20		$40,065.75
Net Present Value (NPV) (B-A)				$6,549.20		$4,065.75

Project A should be accepted based on NPV.

Solution b:

Computation of IRR
Period	Project A		Project A
	Cash Flows	IRR	Cash Flows	IRR
0	-$117,000.00	9.00%	-$36,000.00	12.00%
1	$46,221.00		$14,989.00
2	$46,221.00		$14,989.00
3	$46,221.00		$14,989.00

Excel 10 - Microsoft Excel X 90 = File Home Insert Page Layout Formulas Data Review View - 2 x Calculate Now Insert Function AutoSum Recently Financial Logical Text Date & Lookup & - Used Time Reference Function Library Math & Trig More Functions é a Define Name f Use in Formula Name Manager Create from Selection Defined Names Trace Precedents 5 Show Formulas Trace Dependents Error Checking Remove Arrows" Evaluate Formula Formula Auditing Watch Window Calculation Calculate Sheet Options Calculation M26 M Computaiton of IRR Project A Project A Period IRR Cash Flows -117000 46221 46221 46221 Cash Flows - 36000 14989 14989 14989 =IRR(M20:M23) =IRR(O20:023) 36 I 37 N Ready Sheet423 (8) Sheet50 Sheet29 (2) Sheet56 Sheet58 Sheet156 (54) Sheet60 Shel Sheet29 Sheet37 Circular References BO 100% 0 # @ o sowels alches.com - 9 2 cel mase win. 5:48 AM 11/7/2019

Project B should be accepted based on IRR.