Dwight Donovan, the president of Rooney Enterprises, is considering two investme

Question

Dwight Donovan, the president of Rooney 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 three 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 $113,000 and for Project B are $43,000. The annual expected cash inflows are $53,644 for Project A and $17,903 for Project B. Both investments are expected to provide cash flov benefits for the next three years. Rooney Enterprises' cost of capital is 6 percent. (PV of $1 and PVA of $) (Use appropriate factor(s) from the tables provided.) ints Required 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 eBook Print approach? eferences Complete this question by entering your answers in the tabs below Required A Required B Compute the net present value of each project. Which project should be adopted based on the net present value approach? (Round your final answer to 2 decimal places) Project A Project B Which project should be adopted? Required B

Explanation / Answer

Calculation of NPV:

Project A:

Option B

IRR of Two Projects:

IRR is the discounting rate which results the present value of cash inflows equal to initial cash Outflow.

IRR of Option A - 20%

IRR of Option B - 12%

Year Cash Flow PVIF/PVIFA PV of Cash flow 0         (1,13,000)           1.0000             (1,13,000) 1 to 3               53,644           2.6730               1,43,391 Net Present Value                   30,391

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