cKnight Company is considering two different, mutually exclusive capital expendi
ID: 2455106 • Letter: C
Question
cKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $70,000. Project B will cost $310,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $55,000. A discount rate of 9% 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.)
Explanation / Answer
Year Particluars Project A Project B 0 Cost -400000 -310000 1 to 10 Increase in Cash flow 70000 55000 Project A Project B Cumulative PV for 10 years @9% 6.4177 6.4177 PV of Cash flow for 10 years ( Increase in cashflow * PVF) 449239 352973.5 NPV (PV of cash flow - Original Cost) 49239 42974 Profitability (PV of Cash flows / Original Cost) 1.12 1.14
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