Based on the cashflows to projects A and B, the rate of return, and the period of investment, the project that should be picked by Rundle Enterprises based on net present value is Project A.
The project that should be picked based on Internal rate of return is Project A.
<h3>What are the project net present values:</h3>
Project A's net present value is:
= Present value of cash flows - Initial cash expenditure
= (36,113 x present value interest factor for an annuity, 8%, 5 years) - 108,000
= 36,113 x 3.99271 - 108,000
= $36,188.74
Project B's net present value is:
= 9,612 x 3.99271 - 33,000
= $5,377.93
Project A should therefore be picked as it has the higher net present value.
<h3>What are the project Internal Rate of Returns?</h3>
The rate of return can be found using a spreadsheet as shown attached by using the IRR function.
Project A IRR is 20%.
Project B IRR is 14%.
The IRR rule calls for picking the project with a higher IRR which will be Project A.
Full question is:
Dwight Donovan, the president of Rundle 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 five 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 $108,000 and for Project B are $33,000. The annual expected cash inflows are $36,113 for Project A and $9,612 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Rundle Enterprises’ desired rate of return is 8 percent.
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