McKnight Company is considering two different, mutually exclusive capital expend

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.) Net present value - Project A Profitability index - Project A Net present value - Project B Profitability index - Project B

Explanation / Answer

Net present value of Project A = Present value of cash inflows - Initial investment = $ 70,000 x 6.4177 - $ 400,000 = $ 49,239

Profitablility Index Project A = $ 449,239 / $ 400,000 = 1.12

Net present value of Project B = $ 55,000 x 6.4177 - $ 310,000 = $ 42,974

Profitability Index Project B = $ 352,974 / $ 310,000 = 1.14

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