Sophia Sweeny, the president of Sweeny Enterprise, is considering 2 investment. She can only choose one.
A) Purchase a machine that will enable factory automation: the machine is expected to have a useful life of 4 years and no salvage value.
B) A training program that will improve employees skills. Initial cash expenditures for project A are $300,000 and for project B are $120,000. The annual expected cash inflows are $94,641 for Project A and $39,507 for Project B. Both investments are expected to provide cash flow benefits for the next 4 years. Sweeny Enterprise's cost of capital is 8 percent.
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 of 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 circumstance? Why?