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Senario:
Dwight donovan, the president of donovan enterprises is considering two investment options. Becasue of limited resources he will only be able to invest in one of them. Project A is to purchase a machine that will enable factort automation; the machine is expected to have a useful life of 4 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 anual 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 4 years. Donovan Enterprisis desired rate of return is 8 percent.
Questions:
Question 1: Compute the net present value of each project. Which project should be adopted based on the net present value? Round to 2 decimal points.
Question 2: Compute the approximate internal rate of return on each project. Which should be adopted based on the internal rate of return? Round to 6 decial points.
Question 3: Compare the net present value approach to the internal rate of return approach. Which method is better and why?
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