Brief Exercise 26-10 McKnight Company is considering two different, mutually exc

Question

Brief Exercise 26-10 McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $450,341, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $73,500. Project B will cost $274,383, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $46,800. A discount rate of 9% is appropriate for both projects. 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. LINK TO TEXT

Explanation / Answer

Project A Project B Initial Outflow        -4,50,341 -2,74,383 Life (Years)                      11                11 Salvage Value                       -                   -   Annual Inflow              73,500        46,800 Discount Factor           6.80519     6.80519 Discounted inflow          5,00,182    3,18,483 Initial Outflow        -4,50,341 -2,74,383 NPV              49,841        44,100 PI=(NPV+Initial outflow)/Initial Outflow                  1.11            1.16 On the Basis of NPV Project A is better as NPV of A > NPV of B On the Basis of profitability Index Project B is better as PI of B > PI of A

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