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 $450,341, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $73,500. Project B will cost $274,383, has arn expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $46,800. A discount rate of 9% is appropriate for both projects. Compute the net present value and profitability index of each project. (If the net present value i 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 a displayed in the factor table provided.) Net present value - Project A $ Profitability index - Project A Net present value Project B Profitability index - Project B Which project should be accepted based on Net Present Value? should be accepted. Which project should be accepted based on profitability index? should be accepted

Explanation / Answer

Net Present Value-Project A $     49,841 Profitabilty Index-Project A              1.11 Net Present Value-Project B $     44,100 Profitabilty Index-Project B 1.16 Based on Net Present Value, Project A would be selected. Based on profitability index, Project B would be selected. Working: Project A Project B Present Value of annual cash flow = Annual Cash flow x Cumulative discount factor Present Value of annual cash flow = Annual Cash flow x Cumulative discount factor = $           73,500 x    6.80519 = $          46,800 x    6.80519 = $       5,00,182 = $       3,18,483 Cumulative cash flow = (1-(1+i)^-n)/i Where, Cumulative cash flow = (1-(1+i)^-n)/i Where, = (1-(1+0.09)^-11)/0.09 i 9% = (1-(1+0.09)^-11)/0.09 i 9% =    6.80519 n 11 =    6.80519 n 11 Present Value of annual cash flow $       5,00,182 Present Value of annual cash flow $       3,18,483 Less:Initial Cash investment $       4,50,341 Less:Initial Cash investment $       2,74,383 Net Present Value $           49,841 Net Present Value $          44,100 Profitability Index = Present Value of annual cash flow/Initial Cash investment Profitability Index = Present Value of annual cash flow/Initial Cash investment = $ 5,00,182 / $       4,50,341 = $   3,18,483 / $       2,74,383 =              1.11 = 1.16

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---