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 five 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 $107,000 and for Project B are $36,000. The annual expected cash inflows are $27,509 for Project A and $9,987 for Project B. Both investments are expected to provide cash flow benefits for the next five 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.)

        

Answer 1

Answer:- a-1)- Net present value of Project A = $2835.

Explanation-

Net present value of Project A = Present value of cash inflows – Total outflows

     ={($27509*3.9927) - $107000}

     = $109835- $107000

     = $2835

Net present value of Project B = $3875.

Explanation-

Net present value of Project B = Present value of cash inflows – Total outflows

     ={($9987*3.9927) - $36000}

     = $39875- $36000

     = $3875