Your answer is partially correct. Try again. Beacon Company is considering two d

Question

Your answer is partially correct. Try again. 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. Click here to view the factor table. (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 A Project B Year   PV factor @9% Cash Flows PV of Cash flows Cash Flows PV of Cash flows Year 0             1.000      (400,000)          (400,000)       (280,000)       (280,000) Year 1             0.917           70,000               64,220            50,000            45,872 Year 2             0.842           70,000               58,918            50,000            42,084 Year 3             0.772           70,000               54,053            50,000            38,609 Year 4             0.708           70,000               49,590            50,000            35,421 Year 5             0.650           70,000               45,495            50,000            32,497 Year 6             0.596           70,000               41,739            50,000            29,813 Year 7             0.547           70,000               38,292            50,000            27,352 Year 8             0.502           70,000               35,131            50,000            25,093 Year 9             0.460           70,000               32,230            50,000            23,021 Year 10             0.422           70,000               29,569            50,000            21,121 Total PV of Cash Inflows            449,236          320,883 Investment              400,000          280,000 NPV = $    49,236.04 $ 40,882.89 PI = PV of cash inflows/Investment=               1.1231            1.1460 Project A Project B NPV = $      49,236.0 $   40,882.9 PI =              1.1231           1.1460 Project B should be selected on PI criterion   Projcer A should be selected on NPV criterion

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