McKnight Company is considering two different, mutually exclusive capital expend
ID: 2581128 • Letter: M
Question
McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $463,757, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $68,100. Project B will cost $341,586, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $50,900. 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?
Explanation / Answer
Project A: Present value of annual cash flows 513207 =68100*7.53608 Less: Investment 463757 Net present value 49450 Profitability index =513207/463757= 1.11 Project B: Present value of annual cash flows 383586 =50900*7.53608 Less: Investment 341586 Net present value 42000 Profitability index =383586/341586= 1.12 Project A should be accepted based on Net Present Value Project B should be accepted based on profitability index