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 captial is 8%.
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?
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Please see the attached Excel 97-2003 spreadsheet.
A. Based upon the net present value approach, Project A should be chosen.
B. Based upon the internal rate of return approach, Project B should be chosen.
Given two mutually exclusive investments, this solution uses an Excel 97-2003 spreadsheet to compute the net present value of each project, compute the approximate internal rate of return of each project, and compare the net present value approach with the internal rate of return approach.