Business Question

Reviewthe scenario and watch this week’s videos before you complete the activity below. This scenario can also be found in the “Problems – Series A” section 10-19A of Ch. 10, “Planning for Capital Investments” of Fundamental Managerial Accounting Concepts.

Scenario: Dwight Donovan, the president of Donovan Enterprises, is considering 2 investment opportunities. Because of limited resources, he will be able to invest in only 1 of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of 4 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 $400,000 and for Project B are $160,000. The annual expected cash inflows are $126,000 for Project A and $52,800 for Project B. Both investments are expected to provide cash flow benefits for the next 4 years. Donovan Enterprises’ desired rate of return is 8 percent. Your task as Senior Accountant is to use your knowledge of net present value and internal rate of return to identify the preferred method and best investment opportunity for the company and present your results to Dwight Donovan.

UseExcel®—showing all work and formulas—to compute the following:

Compute the net present value of each project. Round your computations to 2 decimal points.

Compute the approximate internal rate of return for each project. Round your rates to 6 decimal points