Dwight Donovan, the president of Vernon 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 three 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 $35,000. The annual expected cash inflows are $45,826 for Project A and $14,074 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Vernon Enterprises desired rate of return is 8 percent. (PV of $1 and PVA of $1)

Required

• 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?

• Analyze the results of the net present value calculations and the significance of these results, supported with examples.
• Determine which project should be adopted based on the net present value approach and provide rationale for your decision.