Reference no: EM132714821
Using net present value and internal rate of return to evaluate investment opportunities 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.
Question 1: Compute the net present value of each project. Round your computations to 2 decimal points.
Question 2: Compute the approximate internal rate of return for each project.
Question 3: Analyze the results of the net present value calculations and the significance of these results, supported with examples.
Question 4: Determine which project should be adopted based on the net present value approach and provide rationale for your decision.
Question 5: Analyze the results of the internal rate of return calculation and the significance of these results, supported with examples.
Question 6: Determine which project should be adopted based on the internal rate of return approach and provide rationale for your decision.