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 $116,000 and for Project B are $45,000. The annual expected cash inflows are $35,806 for Project A and $14,816 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) (Use appropriate factor(s) from the tables provided.)
- Compute the net present value of each project. Which project should be adopted based on the net present value approach?
- Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?
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