Problem 16-18 Using Net Present Value and Internal Rate of Return to Evaluate Investment Opportunities
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 B are $120,000. The annual expected cash inflows are $94,641 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 capital is 8 percent.
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
approach?
C. Compare the net present value approach with the internal rate of
return approach. Which method is better in the given circumstances? Why?
Check:
a. NPV of A: $13,463.01
b. Rate of Return of B: 12%
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