Dwight Donovan, the president of Benson 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 $111,000 and for Project B are $43,000. The annual expected cash inflows are $37,116 for Project A and $11,929 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Benson Enterprises’ cost of capital is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) 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?

Project A should be selected as the Net Present Value (NPV) and the Internal Rate Return (IRR) is positive and higher in comparison to Project B.

What is Net Present Value?

Net Present Value (NPV) is the difference between the current inflation rate and the current cash flow over a period of time. NPV is used in the capital budget and investment planning to analyze the benefits of a projected investment or project.

1) Calculation of Net Present Value:

Project A: As per the given information,

Cash Outflow given $111,000

Cash inflows for the next 4 years are equal to $37,116

Present Value of annuity $1 at the rate of 8 percent for 4 years is 3.99271

[tex]\rm\,Net \,Present\,Value = - Cash\, Outflows + Present \; Value \; of \; Annuity \; at \;8\%, \;4 \;Years\\\\Net \,Present\,Value = -111,000 + (37,116 \times 3.99271)\\\\Net \,Present\,Value = \$37,193[/tex]

Project B: As per the given information:

Cash Outflow given $43,000

Cash Flows for the next 4 years are $11,929

Present Value of annuity $1 at the rate of 4 years is 3.99271

[tex]\rm\,Net \,Present\,Value = - Cash\, Outflows + Present \; Value \; of \; Annuity \; at \;8\%, \;4 \;Years\\\\Net \,Present\,Value = -\$43,000 + (\$11,929 \times 3.99271)\\\\Net \,Present\,Value = \$4,629[/tex]

Therefore, Project A should be selected as the NPV is higher than project B.

2)Calculation of Internal rate of return:

[tex]\rm\,Internal \; Rate \; of \;return \;approach;\\\\IRR \; is \; the \;discount \; rate \;that \;bring \; NPV \; of \;project's \;cash \;flows \; to \;0. \;Thus: \;\\\rm\,IRR \; for \;Project \; A \; = -111,000 + \dfrac{\rm\,(37,116)}{\rm\,IRR} \times [1-(1+\rm\,IRR)^{-5} ] = 0 \rm\, < = > IRR = 20\%\\IRR \,for\,Project A= 20\%\\IRR for Project B = -43,000 + \dfrac{\rm\,(11,929)}{\rm\,IRR} \times [1-(\rm\,1+IRR)^{-5} ] = 0 < = > IRR = 12\%\\\\\\IRR \;for \;Project \; B = 12\%[/tex]

The internal rate of return in the case of Project A is equal to 20% and Project B is equal to 12%.

Project A should be adopted based on the higher returns achieved in comparison to Project B.

Thus, Project A should be selected as Net present value (NPV) and Internal rate of return(IRR) is higher and positive.

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