McKnight Company is considering two different, mutually exclusive capital expend
ID: 2574753 • Letter: M
Question
McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $448,459, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $73,100. Project B will cost $299,101, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $50.300. A discount rate of 9% is appropriate for both projects a ere ov er nable. 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 calculatiors 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 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: Present value of cash flows 497459 =73100*6.80519 Less: Initial investment 448459 Net present value-Project A 49000 Profitability index-Project A 1.11 =497459/448459 Net present value-Project B: Present value of cash flows 342301 =50300*6.80519 Less: Initial investment 299101 Net present value-Project B 43200 Profitability index-Project B 1.15 =343201/299101 Project A should be accpeted based on Net present value Project B should be accpeted based on Profitability index