Question

Dwight donovan, the president of Perez 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 $113,000 and for project b are $45,000. The annual expected cash infolows are $43,651 for project a and $14,196 for project b. both investments are expected to provide cash flow benefits for the next four years. Perez enterprises desired rate of return is 8 percent. (pv of $1 and PVA of $1) 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 approach?

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

Answer 1

a. compute the net present value of each project. which project should be adopted based on the net present value approach:

Year	Project A	PV factor @8%	Present Value
0	($113,000)	1	($113,000)
1	$43,651	0.926	$40,421
2	$43,651	0.857	$37,409
3	$43,651	0.794	$34,659
4	$43,651	0.735	$32,083
Net Present Value			$31,572

Year	Project B	PV factor @8%	Present Value
0	($45,000)	1	($45,000)
1	$14,196	0.926	$13,145
2	$14,196	0.857	$12,166
3	$14,196	0.794	$11,272
4	$14,196	0.735	$10,434
Net Present Value			$2,017

The project having higher NPV should be chosen, Therefore Project A selected.

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b. compute the approximate internal rate of return of each project. which one should be adopted based on the internal rate of approach:

Project A should be chosen as the IRR of the project A is higher than project B and discount rate.