Beacon Company is considering two different, mutually exclusive capital expendit

Question

Beacon 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 $280,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $50,000. A discount rate of 9% is appropriate for both projects. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) 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.) Which project should be accepted?

Explanation / Answer

pROJECT B SHOULD BE ACCEPTED

Particulars Year PVF @ 9% Cash Flow Project A Cash Flow Project B PV Project A PV Project B Initial Investment 0 1 -400000 -280000 -400000 -280000 Cash Inflows 1 to 10 6.418 70000 50000 449260 320900 Net Present value 49260 40900 Profitability Index 1.1231 1.1461

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