Dwight Donovan, the president of Franklin 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 $110,000 and for Project B are $33,000. The annual expected cash inflows are $52,220 for Project A and $14,214 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Franklin Enterprises desired rate of return is 8 percent. (PV of $1 and PVA of $1) Note: 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 net present value of each project. Which project should be adopted based on the net present value approach? Note: Round your final answers to 2 decimal places. Net Present Value Project A Project B Which project should be adopted?
Dwight Donovan, the president of Franklin 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 $110,000 and for Project B are $33,000. The annual expected cash inflows are $52,220 for Project A and $14,214 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Franklin Enterprises desired rate of return is 8 percent. (PV of $1 and PVA of $1) Note: 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 net present value of each project. Which project should be adopted based on the net present value approach? Note: Round your final answers to 2 decimal places. Net Present Value Project A Project B Which project should be adopted?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Dwight Donovan, the president of Franklin 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 $41,000 and for Project B are $33,000. The annual expected cash inflows are $52,220 for Project A and $14,214 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Franklin Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1)
Note: 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 for 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 net present value of each project. Which project should be adopted based on the net present value approach?
*Note: Round your final answers to 2 decimal places.*
| Net Present Value |
|---------------------|
| Project A |
| Project B |
| Which project should be adopted? |
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