Question

Dwight Donovan, the president of Thornton 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 $104,000 and for Project B are $38,000. The annual expected cash inflows are $40,174 for Project A and $13,042 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Thornton Enterprises’ desired rate of return is 6 percent. (PV of $1 and PVA of $1) (Use appropriate

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

Answer 1

Project A

Intial cash flows.....-104000

Annual cash inflows for 1-4 years = 40174

required return (i) = 6%

number of years (n) =4

Present value of annual cash inflows = Annual cash flows * Cumulative PVF of $1 @6% for 4 years

=40174*3.4651

=139206.9274

NPV = sum of all cash flows

=139206.9274-104000

=35206.9274

NPV of project A is $35207

Project B

Intial cash flows.....-38000

Annual cash inflows for 1-4 years = 13042

required return (i) = 6%

number of years (n) =4

Present value of annual cash inflows = Annual cash flows * Cumulative PVF of $1 @6% for 4 years

=13042*3.4651

=45191.8342

NPV = sum of all cash flows

=45191.8342-38000

=7191.8342

NPV of project B is $7192

NPV of project A is highest, So Project A should be adopted.