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Dwight Donovan, the president of Rundle 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 $108,000 and for Project B are $33,000. The annual expected cash inflows are $36,113 for Project A and $9,612 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Rundle Enterprises’ desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

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Using the Net Present Value approach, the project that Rundle Enterprises should pick based on the desired rate of return and cash flows is Project A.

What are the net present values?

The net present value is the a criteria for picking projects by deducting the expenses from the present value of the cash flows.

The project with the higher net present value should be picked.

The net present value of project A is:

= Present value of cash inflows - Initial expenditure

= (36,113 x present value interest factor for an annuity, 8%, 5 years) - 108,000

= 36,113 x 3.99271 - 108,000

= $36,188.74

The net present value of Project B:
= 9,612 x 3.99271 - 33,000

= $5,377.93

The project with the higher net present value is Project A so it should be selected.

Full question is:

Compute the net present value of each project. Which project should be adopted based on the net present value approach?

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