Dwight Donovan, the president of Thornton 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 $102,000 and for Project B are $48,000. The annual expected cash inflows are $41,740 for Project A and $20,675 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Thornton Enterprises' desired rate of return is 6 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 net present value of each project. Which project should be adopted based on the net present value approach? (Round your final answers to 2 decimal places.) Project A Project B Which project should be adopted? Net Present Value < Required A Required B >
Dwight Donovan, the president of Thornton 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 $102,000 and for Project B are $48,000. The annual expected cash inflows are $41,740 for Project A and $20,675 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Thornton Enterprises' desired rate of return is 6 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 net present value of each project. Which project should be adopted based on the net present value approach? (Round your final answers to 2 decimal places.) Project A Project B Which project should be adopted? Net Present Value < Required A Required B >
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
Related questions
Question
Subject: acounting
Transcribed Image Text:Dwight Donovan, the president of Thornton 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 $102,000 and for Project B are $48,000. The
annual expected cash inflows are $41,740 for Project A and $20,675 for Project B. Both investments are expected to provide cash flow
benefits for the next three years. Thornton Enterprises' desired rate of return is 6 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 net present value of each project. Which project should be adopted based on the net present value approach?
(Round your final answers to 2 decimal places.)
Net Present Value
Project A
Project B
Which project should be adopted?
< Required A
Required B >
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VIEWStep 2: answer to part a. Computation of Net present value of projects.
VIEWStep 3: Computation of Net present value of projects if rate of return is 16%.
VIEWStep 4: Computation of IRR of project A.
VIEWStep 5: Computation of IRR of project B.
VIEWStep 6: answer to part b. IRR and Decision on basis of IRR.
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