Question

In: Accounting

Pedro Spier, the president of Spier Enterprises, is considering two investment opportunities. Because of limited resources,...

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

Solutions

Expert Solution

a.

b.

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


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