Problem 10-19A Using net present value and internal rate of return to evaluate investment opportunities Dwight Donovan, the president of Donovan Enterprises, is considering two inyestment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a măchine that will enáble fạctory automation; the machine is expected to have a useful life of four years and no salyage value. Projęct B supports a training program that will improvę 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. Required a Compute the net present valụe of each project. Which project should be adopted based on the net present value approach? Round your computations to two decimal points. D. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach? Round your rates to six decimal points. c Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?
Problem 10-19A Using net present value and internal rate of return to evaluate investment opportunities Dwight Donovan, the president of Donovan Enterprises, is considering two inyestment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a măchine that will enáble fạctory automation; the machine is expected to have a useful life of four years and no salyage value. Projęct B supports a training program that will improvę 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. Required a Compute the net present valụe of each project. Which project should be adopted based on the net present value approach? Round your computations to two decimal points. D. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach? Round your rates to six decimal points. c Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?
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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Transcribed Image Text:Problem 10-19A Using net present value and internal rate of return to evaluate investment opportunities
Dwight Donovan, the president of Donovan Enterprises, is considering two inyestment opportunities. Because of limited resources, he
will be able to invest in only one of them. Project A is to purchase a măchine that will enáble fạctory automation; the machine is expected
to have a useful life of four years and no salyage value. Projęct B supports a training program that will improvę 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.
Required
a Compute the net present valụe of each project. Which project should be adopted based on the net present value approach? Round your
computations to two decimal points.
D. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return
approach? Round your rates to six decimal points.
c Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances?
Why?
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