Dwight Donovan, the president of Benson Enterprises, is considering two investment opportunities. Because of limited resources,

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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 $111,000 and for Project B are $43,000. The annual expected cash inflows are $37,116 for Project A and $11,929 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.) Required Compute the net present value of each project. Which project should be adopted based on the net present value approach? Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?

Business

1 answer:

arsen [3.4K] · Answer 1 · 2026-04-11T05:36:56+03:00

Answer:

- Net present value for each project:

For Project A: $37,193

For Project B: $4,629

=> Project A should be selected based on the NPV approach due to its higher NPV.

- The internal rate of return for each project:

For Project A: 20%

For Project B: 12%

=> Project A is preferable when considering the IRR approach as it boasts a higher IRR

Explanation:

- The calculations for net present value are as follows:

For Project A: NPV = -111,000 + (37,116/0.08) x [1-1.08^(-5)] = $37,193

For Project B: NPV = -43,000 + (11,929/0.08) x [1-1.08^(-5)] = $4,629.

- Regarding the internal rate of return;

IRR represents the discount rate that results in an NPV of zero for the project's cash flows. Thus:

For Project A: -111,000 + (37,116/IRR) x [1-(1+IRR)^(-5)] = 0 <=> IRR = 20%

For Project B: -43,000 + (11,929/IRR) x [1-(1+IRR)^(-5)] = 0 <=> IRR = 12%