McKnight Company is considering two different, mutually exclusive capital expend
ID: 2457482 • Letter: M
Question
McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $70,000. Project B will cost $310,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $55,000. A discount rate of 9% is appropriate for both projects. Click here to view PV table. Compute the net present value and profitability index of each project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125 and profitability index answers to 2 decimal places, e.g. 15.25. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Brief Exercise 12-5 Your answer is partially correct. Try again Mcknight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $70,000. Project B will cost $310,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $55,000. A discount rate of 9% s appropriate for both projects. Click here to view p table. either a negative sigr actor table provided.) t value is negative, laces as displayed in the profitability index answers to 2 decimal places, e.g. 15.25. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value- Project A Profitability index - Project A Net present value - Project B Profitability index - Project B Compute the net present value and profitability index of each project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125 and e-g, 15.23. Far Cal he net 336,000 project B 267,900 value Which project should be accepted based on Net Present Value? should be accepted. on profit Which project should be accepted based on profitability index? should be acceptedExplanation / Answer
Project A:
Cash Flow Year 0 = 400000
Annual Net Cash Flow for 10 years = 70000
NPV = PVIFA(10 yr, 9%) * 70000 - 400000 = 70000 * 6.4177 - 400000 = 49239
Profitabilty Index = 70000 * (5 years) + (400000-70000*5) / 70000*365 = 5 years and 261 days
Project B:
Cash Flow Year 0 = 310000
Annual Net Cash Flow for 10 years = 55000
NPV = PVIFA(10 yr, 9%) * 55000 - 310000 = 55000 * 6.4177 - 310000 = 42973.50
Profitabilty Index = 55000 * (5 years) + (310000-55000*5) / 55000*365 = 5 years and 232 days
Based On NPV, Project A should be selected as A has higher NPV
Based On PI , Project B should be selected as B will recover the investment faster than A