Dwight Donovan, the president of Donovan 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 four 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 $400,000 and for Project B are $160,000. The annual expected cash inflows are $126,000 for Project A and $52,800 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Donovan Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach? Complete this question by entering your answers in the tabs below. Required A Required 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? Required A Required B
Dwight Donovan, the president of Donovan 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 four 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 $400,000 and for Project B are $160,000. The annual expected cash inflows are $126,000 for Project A and $52,800 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Donovan Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach? Complete this question by entering your answers in the tabs below. Required A Required 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? Required A Required B
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Dwight Donovan, the president of Donovan 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 four 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 $400,000 and for Project B are $160,000. The
annual expected cash inflows are $126,000 for Project A and $52,800 for Project B. Both investments are expected to provide cash
flow benefits for the next four years. Donovan Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use
appropriate factor(s) from the tables provided.)
Required
a. Compute the net present value of each project. Which project should be adopted based on the net present value approach?
b. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return
approach?
Complete this question by entering your answers in the tabs below.
Required A
Required 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?
Required A
Required B
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