Sophia Sweeny, the president of Sweeny Enterprises, is considering two investmen
ID: 2443897 • Letter: S
Question
Sophia Sweeny, the president of Sweeny Enterprises, is considering two investment opportunities. Because of limited resources she 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 $300,000 and for Project A and $39,507 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Sweeny Enterprise's cost of capitial is 8%.Required
a. Compare 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 interal rate of return approach?
c. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?
Explanation / Answer
a)
Calculating Net Present Value
years
A
0
300,000
1
300,000
1
$94,641
0.926
$87,637.57
2
$94,641
0.857
$81,107.34
3
$94,641
0.794
$75,144.95
4
$94,641
0.735
$69,561.14
Net Present Value
$613,451
years
B
0
120,000
1
120,000
1
$39,507
0.926
$36,583.48
2
$39,507
0.857
$33,857.50
3
$39,507
0.794
$31,368.56
4
$39,507
0.735
$29,037.65
Net Present Value
$250,847
Based on NPV we select project A as it has higher NPV
b)
Calculating Internal Rate of Return
(IRR) using Ms-Excel “Spread sheet”
A
B
Year
Cash flows
Year
Cash flows
0
300,000
0
120,000
1
$94,641
1
$39,507
2
$94,641
2
$39,507
3
$94,641
3
$39,507
4
$94,641
4
$39,507
IRR =
IRR =
10%
12%
As per IRR we select project B as it have higher IRR
c)
NPV method is better in the given circumstances because
As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in.
The advantage to using the NPV method here is that NPV can handle multiple discount rates without any problems. Each cash flow can be discounted separately from the others
Investment decisions are essential for a business as they define the future survival, and growth of the organization. The main objective of a business being the maximization of shareholders' wealth. Therefore a firm needs to invest in every project that is worth more than the costs. The Net Present value is the difference between the project's value and its costs. Thus to make shareholders happy, a firm must invest in projects with positive NPVs.
Note:-
As you not provide the cash inflows of the projects but I found it in other sources and provide answer next time please provide with full question thank you….
Calculating Net Present Value
years
A
0
300,000
1
300,000
1
$94,641
0.926
$87,637.57
2
$94,641
0.857
$81,107.34
3
$94,641
0.794
$75,144.95
4
$94,641
0.735
$69,561.14
Net Present Value
$613,451
years
B
0
120,000
1
120,000
1
$39,507
0.926
$36,583.48
2
$39,507
0.857
$33,857.50
3
$39,507
0.794
$31,368.56
4
$39,507
0.735
$29,037.65
Net Present Value
$250,847
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.