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 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 $106,000 and for Project B are $40,000. The annual expected cash inflows are $40,947 for Project A and $13,169 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Spier Enterprises’ cost of capital is 8 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? Project B Project A 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? Project B Project A

Answer 1

Answer 1.
Calculation of NPV of Project
Particulars	Year	8% Factor	Project A		Project B
			Amount	Present value	Amount	Present value
		C	D	C X D	E	C X E
Cash Inflow
Net Cash Inflow - Cost savings	1-4	3.31213	40,947	135,622	13,169	43,617
A. Total Cash Inflow - PV				135,622		43,617
Cash Outflow
Cost of Project	0	1.00000	106,000	106,000	40,000	40,000
B. Total Cash Outflow - PV				106,000		40,000
NPV (A - B)				29,622		3,617
Project A should be selected
Answer 2.
	Year	Project A	Project B
Intial Investment	0	(106,000)	(40,000)
Expcted Net Cash inflow	1	40,947	13,169
	2	40,947	13,169
	3	40,947	13,169
	4	40,947	13,169
Internal Rate of Return		20.00%	12.00%
Project A should be selected