Dwight Donovan, the president of Jordan 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 $112,000 and for Project B are $33,000. The annual expected cash inflows are $31,070 for Project A and $9,612 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Jordan Enterprises desired rate of return is 4 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required
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Compute the net present value of each project. Which project should be adopted based on the net present value approach?
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Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?
TABLE 1 PRESENT VALUE OF $1 n 1 2 3 4 5 6 7 8 9 10 4% 5% 6% 7% 8% 0.961538 0.952381 0.943396 0.934579 0.925926 0.924556 0.907029 0.889996 0.873439 0.857339 0.888996 0.863838 0.839619 0.816298 0.793832 0.854804 0.822702 0.792094 0.762895 0.735030 0.821927 0.783526 0.747258 0.712986 0.680583 0.790315 0.746215 0.704961 0.666342 0.630170 0.759918 0.710681 0.665057 0.622750 0.583490 0.730690 0.676839 0.627412 0.582009 0.540269 0.702587 0.644609 0.591898 0.543934 0.500249 0.675564 0.613913 0.558395 0.508349 0.463193 0.649581 0.584679 0.526788 0.475093 0.428883 0.624597 0.556837 0.496969 0.444012 0.397114 0.600574 0.530321 0.468839 0.414964 0.367698 0.577475 0.505068 0.442301 0.387817 0.340461 0.555265 0.481017 0.417265 0.362446 0.315242 0.533908 0.458112 0.393646 0.338735 0.291890 0.513373 0.436297 0.371364 0.316574 0.270269 0.493628 0.415521 0.350344 0.295864 0.250249 0.474642 0.395734 0.330513 0.276508 0.231712 0.456387 0.376889 0.311805 0.258419 0.214548 9% 0.917431 0.841680 0.772183 0.708425 0.649931 0.596267 0.547034 0.501866 0.460428 0.422411 0.387533 0.355535 0.326179 0.299246 0.274538 0.251870 0.231073 0.211994 0.194490 0.178431 10% 12% 0.909091 0.892857 0.826446 0.797194 0.751315 0.711780 0.683013 0.635518 0.620921 0.567427 0.564474 0.506631 0.513158 0.452349 0.466507 0.403883 0.424098 0.360610 0.385543 0.321973 0.350494 0.287476 0.318631 0.256675 0.289664 0.229174 0.263331 0.204620 0.239392 0.182696 0.217629 0.163122 0.197845 0.145644 0.179859 0.130040 0.163508 0.116107 0.148644 0.103667 14% 16% 20% 0.877193 0.862069 0.833333 0.769468 0.743163 0.694444 0.674972 0.640658 0.578704 0.592080 0.552291 0.482253 0.519369 0.476113 0.401878 0.455587 0.410442 0.334898 0.399637 0.353830 0.279082 0.350559 0.305025 0.232568 0.307508 0.262953 0.193807 0.269744 0.226684 0.161506 0.236617 0.195417 0.134588 0.207559 0.168463 0.112157 0.182069 0.145227 0.093464 0.159710 0.125195 0.077887 0.140096 0.107927 0.064905 0.122892 0.093041 0.054088 0.107800 0.080207 0.045073 0.094561 0.069144 0.037561 0.082948 0.059607 0.031301 0.072762 0.051385 0.026084 11 12 13 14 15 16 17 18 19 20 TABLE 2 PRESENT VALUE OF AN ANNUITY OF $1 n 4% 8% 9% 10% 1 2 3 4 0.961538 1.886095 2.775091 3.629895 4.451822 5.242137 6.002055 6.732745 5 6 7 8 9 10 5% 6% 7% 0.952381 0.943396 0.934579 1.859410 1.833393 1.808018 2.723248 2.673012 2.624316 3.545951 3.465106 3.387211 4.329477 4.212364 4.100197 5.075692 4.917324 4.766540 5.786373 5.582381 5.389289 6.463213 6.209794 5.971299 7.107822 6.801692 6.515232 7.721735 7.360087 7.023582 8.306414 7.886875 7.498674 8.863252 8.383844 7.942686 9.393573 8.852683 8.357651 9.898641 9.294984 8.745468 10.379658 9.712249 9.107914 10.837770 10.105895 9.446649 11.274066 10.477260 9.763223 11.689587 10.827603 10.059087 12.085321 11.158116 10.335595 12.462210 11.469921 10.594014 0.925926 0.917431 1.783265 1.759111 2.577097 2.531295 3.312127 3.239720 3.992710 3.889651 4.622880 4.485919 5.206370 5.032953 5.746639 5.534819 6.246888 5.995247 6.710081 6.417658 7.138964 6.805191 7.536078 7.160725 7.903776 7.486904 8.244237 7.786150 8.559479 8.060688 8.851369 8.312558 9.121638 8.543631 9.371887 8.755625 9.603599 8.905115 9.818147 9.128546 0.909091 1.735537 2.486852 3.169865 3.790787 4.355261 4.868419 5.334926 5.759024 6.144567 6.495061 6.813692 7.103356 7.366687 7.606080 7.823709 8.021553 8.201412 8.364920 8.513564 12% 14% 16% 20% 0.892857 0.877193 0.862069 0.833333 1.690051 1.646661 1.605232 1.527778 2.401831 2.321632 2.245890 2.106481 3.037349 2.913712 2.798181 2.588735 3.604776 3.433081 3.274294 2.990612 4.111407 3.888668 3.684736 3.325510 4.563757 4.288305 4.038565 3.604592 4.967640 4.638864 4.343591 3.837160 5.328250 4.946372 4.606544 4.030967 5.650223 5.216116 4.833227 4.192472 5.937699 5.452733 5.028644 4.327060 6.194374 5.660292 5.197107 4.439217 6.423548 5.842362 5.342334 4.532681 6.628168 6.002072 5.467529 4.610567 6.810864 6.142168 5.575456 4.675473 6.973986 6.265060 5.668497 4.729561 7.119630 6.372859 5.748704 4.774634 7.249670 6.467420 5.817848 4.812195 7.365777 6.550369 5.877455 4.843496 7.469444 6.623131 5.928841 4.869580 7.435332 8.110896 8.760477 9.385074 9.985648 10.563123 11.118387 11.652296 12.165669 12.659297 13.133939 13.590326 11 12 13 14 15 16 17 18 19 20
