Question

Pedro Spier, the president of Spier 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 $106,000 and for Project B are $33,000. The annual expected cash inflows are $50,321 for Project A and $13,740 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Spier Enterprises’ cost of capital is 6 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

a-1.	Compute the net present value of each project. (Round your intermediate calculations and final answers to 2 decimal places.)

        

a-2.	Which project should be adopted based on the net present value approach?
	multiple choice 1 Project A Project B

b-1.	Compute the approximate internal rate of return of each project.

        

b-2.	Which one should be adopted based on the internal rate of return approach?
	multiple choice 2 Project B Project A

Answer 1

a.

b.

As per Internal rate of return(IRR) approach, Project A must be adopted since it has higher IRR.