Sophia Seeny, 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 factory automation; the machine in 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 $300k and for Project B are $120K. The annual expected cash inflows are $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 Enterprises cost of capital 8 percent.
a. compute the net preset value of each project. Which project should be adopted based on the net preset 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 preset value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?