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Capital Budgeting : NPV and IRR methods

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The projected cash flows for two mutually exclusive projects are as follows:
Year Project A Project B
0 ($150,000) ($150,000)
1 0 50,000
2 0 50,000
3 0 50,000
4 0 50,000
5 250,000 50,000

If the cost of capital is 10%, the decidedly more favorable project is:
a. project B with an NPV of $39,539 and an IRR of 19.9%.
b. project A with an NPV of $5,230 and an IRR of 10.8%.
c. project A with an NPV of $39,539 and an IRR of 10.8%.
d. project B with an NPV of $5,230 and an IRR of 19.9%.

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https://brainmass.com/business/capital-budgeting/capital-budgeting-npv-and-irr-methods-464604

Solution Preview

Please refer attached file for better clarity of tables.

Cash Flows
Year Project A Project B PV Factor, PVF PV - Project A PV - Project B
n Ca Cb 1/(1+10%)^n Ca*PVF Cb*PVF
0 -150000 ...

Solution Summary

Solution describes the steps to calculate NPV and IRR in the given cases.

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Use NPV and IRR methods to evaluate the investment opportunities

Veronica Tanner, the president of Tanner Enterprises, is considering two investment opportunities. Because of limited resources, she will be able to invest in only one for 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 $100,000 and for Project B are $40,000. The annual expected cash inflows are $31,487 for Project A and $13,169 for Project B. Both Investments are expected to provide cash flow benefits for the next four years. Tanner Enterprise's cost of capital is 8 percent.

a. Compute the net present value of each 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?

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