Question

# McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost \$...

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.

 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