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Sofia Sweeny of Sweeny Enterprise: NPV, IRR, rate of return

Sofia Sweeny, the president of Sweeny Enterprise,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 $94,641 for Project A and $39,507 for Project B. Both investment are expected to provide cash flow benefits for the next four years. Sweeny Enterprise's cost of capital 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 for 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?

Solution Summary

Your tutorial computes NPV and IRR for both projects in Excel (attached). Then, a paragraph explains this OTA's view on which projects is preferred under these circumstances and why.