Question

Dwight Donovan, the president of Vernon 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 $110,000 and for Project B are $44,000. The annual expected cash inflows are $30,515 for Project A and $12,816 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Vernon Enterprises’ desired rate of return is 4 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?

Compute the net present value of each project. Which project should be adopted based on the net present value approach? (Round your final answers to 2 decimal places.)

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

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
Year	CF	PVF@4%	Disc CF
0	$       -1,10,000	1	$ -1,10,000.00
1	$           30,515	0.9615	$      29,341.35
2	$           30,515	0.9246	$      28,212.83
3	$           30,515	0.8890	$      27,127.72
4	$           30,515	0.8548	$      26,084.35
5	$           30,515	0.8219	$      25,081.11
NPV pf Project A	$      25,847.36
Project B
Year	CF	PVF@4%	Disc CF
0	$          -44,000	1	$     -44,000.00
1	$           12,816	0.9615	$      12,323.08
2	$           12,816	0.9246	$      11,849.11
3	$           12,816	0.8890	$      11,393.38
4	$           12,816	0.8548	$      10,955.17
5	$           12,816	0.8219	$      10,533.82
NPV pf Project B	$      13,054.55

Based on NPV, Project A has to be selected as it has higher NPV

IRR of Project A

IRR :
IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows.

Based on Trail and error method IRR of the project A is 12% , Calculation given below

Year	Cash Flow	PVF/[email protected]	PV of Cash Flows
1-5	$          30,515.00	3.6048	$                     1,10,000
PV of Cash Inflows	$                    1,10,000
PV of Cash Oiutflows	$              1,10,000.00
NPV	$ 0

IRR of Project B

Year	Cash Flow	PVF/[email protected]	PV of Cash Flows
1-5	$          12,816.00	3.4331	$                        43,998
PV of Cash Inflows	$                        43,998
PV of Cash Oiutflows	$                  44,000.00
NPV	$                                -2

Project With Higher IRR has to be slected, So based on IRR project B has to be selected

Pls do rate, if the answer is correct and comment, if any further assistance is required.