Question

Dwight Donovan, the president of Baird 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 $111,000 and for Project B are $48,000. The annual expected cash inflows are $34,262 for Project A and $16,474 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Baird Enterprises’ cost of capital is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

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 return approach?

Required A

Compute the net present value of each project. Which project should be adopted based on the net present value approach? (Round your intermediate calculations and final answers to 2 decimal places.)

	Net Present Value
Project A
Project B
Which project should be adopted?

Required B

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

	Internal Rate of Return
Project A		%
Project B		%
Which project should be adopted?

Answer 1

Req 1.
			Project A	Project B
Cash inflows annual			34262	16474
Annuity PVF at 8% for 4 years			3.31213	3.31213
Present value of Inflows			113480.198	54564.03
Less: Initial Investment			111000	48000
NPV			2480.19806	6564.03
Project B shall be accepted
Req 2.
			Project A	Project B
Cash inflows annual			34262	16474
Annuity PVF at 9% for 4 years			3.23972
Annuity PVF at 12% for 4 years				2.97447
Present value of Inflows			110999.287	49001.42
Less: Initial Investment			111000	49000
NPV			-0.71336	1.41878
IRR			9%	13%
Project B shall be accepted