Pedro Spier, the president of Spier Enterprises, is considering two investment o

Question

Pedro Spier, the president of Spier 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 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 $106,000 and for Project B are $40,000. The annual expected cash inflows are $40,947 for Project A and $13,169 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Spier Enterprises’ cost of capital is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a-1. Compute the net present value of each project. (Round your intermediate calculations and final answers to 2 decimal places.) a-2. Which project should be adopted based on the net present value approach? Project B Project A b-1. Compute the approximate internal rate of return of each project. b-2. Which one should be adopted based on the internal rate of return approach? Project B Project A

Explanation / Answer

Answer 1. Calculation of NPV of Project Particulars Year 8% Factor Project A Project B Amount Present value Amount Present value C D C X D E C X E Cash Inflow Net Cash Inflow - Cost savings 1-4                 3.31213                      40,947              135,622                13,169                 43,617 A. Total Cash Inflow - PV              135,622                 43,617 Cash Outflow Cost of Project 0                 1.00000                    106,000              106,000                40,000                 40,000 B. Total Cash Outflow - PV              106,000                 40,000 NPV (A - B)                29,622                    3,617 Project A should be selected Answer 2. Year Project A Project B Intial Investment 0               (106,000)                    (40,000) Expcted Net Cash inflow 1                    40,947                      13,169 2                    40,947                      13,169 3                    40,947                      13,169 4                    40,947                      13,169 Internal Rate of Return 20.00% 12.00% Project A should be selected

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