Question

# Dwight Donovan, the president of Benson Enterprises, is considering two investment opportunities. Because of limited resources,...

Dwight Donovan, the president of Benson 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 \$118,000 and for Project B are \$45,000. The annual expected cash inflows are \$45,582 for Project A and \$16,082 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Benson Enterprises’ desired rate of return is 8 percent. (PV of \$1 and PVA of \$1) (Use appropriate factor(s) from the tables provided.)

Required

1. Compute the net present value of each project. Which project should be adopted based on the net present value approach?

2. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?

a) Computation Of NPV

 Project A Project B Particular Period PV Factor (8%) Amount (\$) Present value Amount (\$) Present value Cash Outflows : Initial Investment 0 1 118000 118000 45000 45000 PV of cash outflow (a) 118000 45000 Cash inflows : Annual cash inflows 1 - 4 3.3121 45582 150972 16082 53265 PV of cash inflows (b) 150972 53265 Net Present value ( B - A) 32972 8265

Based on NPV project A should be selected.

b) Computation Of IRR

 Period Project A Project B Cash Flow IRR Cash Flow IRR 0 -118000 -45000 1 45582 16082 2 45582 20% 16082 16% 3 45582 16082 4 45582 16082

Project A should be selected base on IRR