Dwight Donovan, the president of Finch 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 $120,000 and for Project B are $39,000. The annual expected cash inflows are $40,126 for Project A and $10,819 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Finch Enterprises cost of capital is 6 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
a. Compute the net present value of each project. Which project should be adopted based on the net present value approach?
| | Net Present Value |
| Project A | ? |
| Project B | ? |
| Which project should be adopted? | ? |
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? | |
TABLE 1 PRESENT VALUE OF $1 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 20% h 0.952381 0.892857 1 0.961538 0.943396 0.934579 0.925926 0.917431 0.909091 0.877193 0.862069 0.833333 2 0.924556 0.907029 0.889996 0.873439 0.857339 0.841680 0.826446 O.797194 O.769468 O.743163 0.694444 0.751315 0.711780 0.640658 0.888996 0.863838 0.839619 0.816298 O.793832 0.772183 0.674972 0.578704 0.762895 0.854804 0.822702 O.792094 O.735030 O.708425 0.683013 0.635518 0.592080 0.552291 0.482253 0.747258 0.519369 0.712986 0.680583 0.401878 0.821927 0.783526 0.649931 0.620921 0.567427 0.476113 O.666342 0.630170 0.455587 0.334898 6 O.790315 0.746215 O.704961 0.596267 0.564474 0.506631 0.410442 0.583490 0.279082 7 O.759918 0.710681 0.665057 0.622750 0.547034 0.513158 0.452349 0.399637 0.353830 0.627412 0.582009 0.540269 0.232568 0.730690 0.676839 0.501866 0.466507 0.403883 0.350559 0.305025 0.644609 0.591898 0.460428 0.360610 9 O.702587 0.543934 0.500249 0.424098 0.307508 0.262953 0.193807 0.226684 10 0.675564 0.613913 0.558395 0.508349 0.463193 0.422411 0.385543 0.321973 0.269744 0.161506 0.195417 11 0.649581 0.584679 0.526788 0.475093 0.428883 0.387533 0.350494 0.287476 0.236617 0.134588 0.397114 12 0.624597 0.556837 0.496969 0.444012 0.355535 0.318631 0.256675 0.207559 0.168463 0.112157 0.600574 0.530321 0.229174 13 0.468839 0.414964 0.367698 0.326179 0.289664 0.182069 0.145227 0.093464 0.125195 0.442301 0.299246 14 0.577475 0.505068 0.387817 0.340461 0.263331 0.204620 0.159710 0.077887 15 0.555265 0.481017 0.417265 0.362446 0.315242 0.274538 0.239392 0.182696 0.140096 0.107927 0.064905 0.533908 0.393646 16 0.458112 0.338735 0.291890 0.251870 0.217629 0.163122 0.122892 0.093041 0.054088 0.371364 0.231073 0.145644 17 0.513373 0.436297 0.316574 0.270269 0.197845 0.107800 0.080207 O.045073 0.415521 18 0.493628 0.350344 0.295864 0.250249 0.211994 0.179859 0.130040 0.094561 0.069144 0.037561 0.082948 19 0.474642 0.395734 0.330513 0.276508 0.231712 0.194490 0.163508 0.116107 0.059607 0.031301 0.178431 0.103667 20 0.456387 0.376889 0.311805 0.258419 0.214548 0.148644 0.072762 0.051385 0.026084 TABLE 2 PRESENT VALUE OF AN ANNUITY OF $1 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 20% 0.934579 0.925926 0.892857 0.862069 0.833333 0.961538 0.952381 0.943396 0.917431 0.909091 0.877193 1.690051 2 1.886095 1.859410 1.833393 1.808018 1.783265 1.759111 1.735537 1.646661 1.605232 1.527778 2.577097 2.106481 3 2.775091 2.723248 2.673012 2.624316 2.531295 2.486852 2.401831 2.321632 2.245890 3.629895 3.465106 3.387211 2.798181 2.588735 4 3.545951 3.312127 3.239720 3.169865 3.037349 2.913712 4.451822 4.329477 5 4.212364 4.100197 3.992710 3.889651 3.790787 3.604776 3.433081 3.274294 2.990612 4.766540 5.075692 4.355261 6 5.242137 4.917324 4.622880 4.485919 4.111407 3.888668 3.684736 3.325510 5.786373 7 6.002055 5.582381 5.389289 5.206370 5.032953 4.868419 4.563757 4.288305 4.038565 3.604592 6.463213 5.334926 6.732745 6.209794 5.971299 5.746639 5.534819 4.967640 4.638864 4.343591 3.837160 6.801692 7107822 6.246888 4.946372 7.435332 6.515232 5.995247 5.759024 5.328250 4.606544 4.030967 7.360087 7.023582 5.216116 4.833227 10 8.110896 7.721735 6.710081 6.417658 6.144567 5.650223 4.192472 11 8.760477 8.306414 7886875 7.498674 7.138964 6.805191 6.495061 5.937699 5.452733 5.028644 4.327060 6.813692 6.194374 12 9.385074 8.863252 8.383844 7.942686 7.536078 7160725 5.660292 5.197107 4.439217 9.985648 7.486904 7.103356 5.842362 13 9.393573 8.852683 8.357651 7.903776 6.423548 5.342334 4.532681 6.628168 6.002072 14 10.563123 9.898641 9.294984 8.745468 8.244237 7.786150 7.366687 5.467529 4.610567 9.712249 9.107914 8.559479 7.606080 5.575456 15 11.118387 10.379658 8.060688 6.810864 6.142168 4.675473 16 11.652296 10.837770 10.105895 9.446649 8.851369 8.312558 7.823709 6.973986 6.265060 5.668497 4.729561 7.119630 9.763223 17 12.165669 11.274066 10.477260 9.121638 8.543631 8.021553 6.372859 5.748704 4.774634 11.689587 9.371887 18 12.659297 10.827603 10.059087 8.755625 8.201412 7.249670 6.467420 5.817848 4.812195 19 13.133939 12.085321 11.158116 10.335595 9.603599 8.905115 8.364920 7.365777 6.550369 5.877455 4.843496 11.469921 10.594014 7.469444 20 13.590326 12.462210 9.818147 9.128546 8.513564 6.623131 5.928841 4,869580
