Question

McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $ 506,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $ 69,900. Project B will cost $ 314,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $ 45,200. A discount rate of 7% 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 $ enter a dollar amount rounded to 0 decimal places

Profitability index - Project A enter the profitability index rounded to 2 decimal places

Net present value - Project B $ enter a dollar amount rounded to 0 decimal places

Profitability index - Project B enter the profitability index rounded to 2 decimal places

Which project should be accepted based on Net Present Value? select a projectselect a project should be accepted.

Which project should be accepted based on profitability index? select a projectselect a project should be accepted.

Answer 1

Project A:
Present value of net annual cash flows	555194	=69900*7.94269
Less: Investment cost	-506000
Net present value - Project A	49194
Profitability index - Project A	1.10	=555194/506000
Project B:
Present value of net annual cash flows	359010	=45200*7.94269
Less: Investment cost	-314000
Net present value - Project B	45010
Profitability index - Project B	1.14	=359010/314000
Project A should be accepted based on Net Present Value
Project B should be accepted based on profitability index