Beacon Company is considering two different, mutually exclusive capital expendit
ID: 2467491 • Letter: B
Question
Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $472,346, has an expected useful life of 13 years, a salvage value of zero, and is expected to increase net annual cash flows by $70,200. Project B will cost $307,572, has an expected useful life of 13 years, a salvage value of zero, and is expected to increase net annual cash flows by $47,600. A discount rate of 9% is appropriate for both projects.
Compute the net present value and profitability index of each project.
Explanation / Answer
Statement showing Cash flows Project A Project B Particulars Time PVf@9% Amount PV Amount PV Cash Outflows - 1.00 (472,346.00) (472,346.00) (307,572.00) (307,572.00) PV of Cash outflows = PVCO (472,346.00) (307,572.00) Cash inflows 1.00 0.9174 70,200.00 64,403.67 47,600.00 43,669.72 Cash inflows 2.00 0.8417 70,200.00 59,085.94 47,600.00 40,063.97 Cash inflows 3.00 0.7722 70,200.00 54,207.28 47,600.00 36,755.93 Cash inflows 4.00 0.7084 70,200.00 49,731.45 47,600.00 33,721.04 Cash inflows 5.00 0.6499 70,200.00 45,625.18 47,600.00 30,936.73 Cash inflows 6.00 0.5963 70,200.00 41,857.97 47,600.00 28,382.32 Cash inflows 7.00 0.5470 70,200.00 38,401.80 47,600.00 26,038.83 Cash inflows 8.00 0.5019 70,200.00 35,231.01 47,600.00 23,888.83 Cash inflows 9.00 0.4604 70,200.00 32,322.03 47,600.00 21,916.36 Cash inflows 10.00 0.4224 70,200.00 29,653.24 47,600.00 20,106.75 Cash inflows 11.00 0.3875 70,200.00 27,204.81 47,600.00 18,446.56 Cash inflows 12.00 0.3555 70,200.00 24,958.54 47,600.00 16,923.45 Cash inflows 13.00 0.3262 70,200.00 22,897.74 47,600.00 15,526.10 PV of Cash Inflows=PVCI 525,580.66 356,376.63 NPV = PVCI - PVCO 53,234.66 48,804.63 PI = PVCI/PVCO 1.11 1.16
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