McKnight Company is considering two different, mutually exclusive capital expend
ID: 2481118 • Letter: M
Question
McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $448,211, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $69,500. Project B will cost $290,158, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $46,400. 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
Solution:
Project A
NPV = PV of cash inflows - Initial investment
= 69500 * PVIFA (9%,12) - 448211
= 49460
PI = PV of cash inflows/Initial investment
= 497671/448211
= 1.11
Project B
NPV = 46400* PVIFA (9%,12) - 290158
= 42100
PI = 332258/290158
= 1.15