Reference no: EM133157400

Question - Dwight Donovan, the president of Vernon 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 $109,000 and for Project B are $30,000. The annual expected cash inflows are $28,023 for Project A and $8,739 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Vernon Enterprises' desired rate of return is 6 percent.

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?