Dwight Donovan, the president of Donovan 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 four years and no . 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 four years. Donovan Enterprises’ is 8 percent.
Required
a. Compute the of each project. Which project should be adopted based on the approach? Round your computations to two decimal points.
b. Compute the approximate of each project. Which one should be adopted based on the approach? Round your rates to six decimal points.
c. Compare the approach with the approach. Which method is better in the given circumstances? Why?
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