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Compute the approximate internal rate of return

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Reference no: EM132461936

Problem : Dwight Donovan, the president of Benson 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 five 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 $115,000 and for Project B are $49,000. The annual expected cash inflows are $38,454 for Project A and $14,965 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Benson Enterprises' cost of capital is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

TABLE 2

PRESENT VALUE OF AN ANNUITY OF $1

 

 

 

 

 

 

 

n

4%                   5%

6%

7%

8%

9%

10%

12%

14%

16%

20%

1

0.961538           0.952381

0.943396

0.934579

0.925926

0.917431

0.909091

0.892857

0.877193

0.862069

0.833333

2

1.886095           1.859410

1.833393

1.808018

1383265

1.759111

1335537

1.690051

1.646661

1.605232

1.527778

3

2.775091           2.723248

2.673012

2.624316

2.577097

2.531295

2.486852

2.401831

2.321632

2.245890

2106481

4

3.629895           3.545951

3.465106

3.387211

3.312127

3.239720

3169865

3.037349

2.913712

2798181

2.588735

5

4.451822           4.329477

4.212364

4100197

3.992710

3.889651

3390787

3.604776

3.433081

3.274294

2.990612

6

5.242137           5.075692

4.917324

4766540

4.622880

4.485919

4.355261

4111407

3.888668

3.684736

3.325510

7

6.002055            5386373

5.582381

5.389289

5.206370

5.032953

4.868419

4.563757

4.288305

4.038565

3.604592

8

6332745           6.463213

6.209794

5.971299

5746639

5.534819

5.334926

4.967640

4.638864

4.343591

3.837160

9

7.435332            7107822

6.801692

6.515232

6.246888

5.995247

5.759024

5.328250

4.946372

4.606544

4.030967

10

8110896            7721735

7.360087

7.023582

6310081

6.417658

6144567

5.650223

5.216116

4.833227

4192472

11

8360477           8.306414

7.886875

7.498674

7138964

6.805191

6.495061

5.937699

5.452733

5.028644

4.327060

12

9.385074           8.863252

8.383844

7.942686

7.536078

7160725

6.813692

6194374

5.660292

5197107

4.439217

13

9.985648           9.393573

8.852683

8.357651

7.903776

7.486904

7103356

6.423548

5.842362

5.342334

4.532681

14

10.563123           9.898641

9.294984

8345468

8.244237

7386150

7.366687

6.628168

6.002072

5.467529

4.610567

15

11118387           10.379658

9712249

9107914

8.559479

8.060688

7.606080

6.810864

6142168

5.575456

4.675473

16

11.652296         10.837770

10105895

9.446649

8.851369

8.312558

7.823709

6.973986

6.265060

5.668497

4729561

17

12165669         11.274066

10.477260

9.763223

9121638

8.543631

8.021553

7119630

6.372859

5.748704

4.774634

18

12.659297         11.689587

10.827603

10.059087

9.371887

8.755625

8.201412

7.249670

6.467420

5.817848

4.812195

19

13133939         12.085321

11158116

10.335595

9.603599

8.905115

8.364920

7.365777

6.550369

5.877455

4.843496

20

13.590326         12.462210

11.469921

10.594014

9.818147

9128546

8.513564

7.469444

6.623131

5.928841

4.869580

Required

Question A. Compute the net present value of each project. Which project should be adopted based on the net present value approach?

Question B. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?

Reference no: EM132461936

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