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 $592,821, has an expected useful life of 15 years, a salvage value of zero, and is expected to increase net annual cash flows by $75,000. Project B will cost $396,957, has an expected useful life of 15 years, a salvage value of zero, and is expected to increase net annual cash flows by $51,400. A discount rate of 8% 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.)

Which project should be accepted based on Net Present Value?

Which project should be accepted based on profitability index?

Net present value - Project A $

Profitability index - Project A

Net present value - Project B $

Profitability index - Project B

Explanation / Answer

SOLUTION

1. Net Present Value-

2. Profitability index

While choosing for the project, project B would be better and preferably.

- The reason is that it has the initial investment of $195,864 less.

- Its profitability index is more.

- The NPV is also less with the savings on the initial investment being more.

Project A Project B Discount factor: for 15 years/periods, i-8% 8.55948 8.55948 Net cash flows 75,000 51,400 The current value of the net cash flows 641,961 439,957 Less: Capital investment (592,821) (396,957) Net Present value 49,140 43,000

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