Brief Exercise 26-5 McKnight Company is considering two different, mutually excl

ID: 2547881 • Letter: B

Question

Brief Exercise 26-5 McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $458,547, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $74,600. Project B will cost $273,500, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $46,200. A discount rate of 9% is appropriate for both projects. Click here to view PV table. cc hetr tles,salvaguof r 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 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

Project A

Project B

Cost (Outflow)

458547

273500

Useful life

Salvage value

Annual Cash Inflow

74600

46200

Discount Rate

Discount factor

6.2065

PV of cash Inflow

463004.90

286740.30

Net Present Value

4457.90

13240.30

Profitability Index

1.010

1.048

Project B should be chosen in both scenarios either based on Net Present Value and Profitability index as both are higher for Project B. Also, the initial investment is low too.