Beacon Company is considering two different, mutually exclusive capital expendit
ID: 2473116 • Letter: B
Question
Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $495,478, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $70,600. Project B will cost $322,565, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $48,100. A discount rate of 9% is appropriate for both projects.
edugen.wileyplus.com References TABLE 1 Future Value of 1 Periods 4% 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.04000 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 1.11000 1.12000 1.15000 1.08160 1.10250 1.12360 .14490 1.16640 1.18810 1.21000 1.23210 1.25440 1.32250 1.12486 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 1.36763 1.40493 1.52088 1.16986 1.21551 1.26248 1.31080 1.36049 1.41158 1.46410 1.51807 1.57352 1.74901 1.21665 1.27628 1.33823 1.40255 1.46933 1.53862 1.61051 1.68506 1.76234 2.01136 1.26532 1.34010 1.41852 1.50073 1.58687 1.67710 1.77156 1.87041 1.97382 2.31306 1.31593 1.40710 1.50363 1.60578 1.71382 1.82804 1.94872 2.07616 2.21068 2.66002 1.36857 1.47746 1.59385 1.71819 1.85093 1.99256 2.14359 2.30454 2.47596 3.05902 1.42331 1.55133 1.68948 1.83846 1.99900 2.17189 2.35795 2.55803 2.77308 3.51788 1.48024 1.62889 1.79085 1.96715 2.15892 2.36736 2.59374 2.83942 3.10585 4.04556 1.53945 1.71034 1.898302.10485 2.33164 2.58043 2.85312 3.15176 3.47855 4.65239 1.60103 1.79586 2.01220 2.25219 2.51817 2.81267 3.13843 3.49845 3.89598 5.35025 1.66507 1.88565 2.1329 2.40985 2.71962 3.06581 3.45227 3.88328 4.36349 6.15279 1.73168 1.979932.26090 2.57853 2.937193.34173 3.79750 4.310444.88711 7.07571 1.80094 2.078932.39656 2.75903 3.17217 3.64248 4.17725 4.78459 5.47357 8.13706 1.87298 2.18287 2.54035 2.95216 3.42594 3.97031 4.59497 5.31089 6.13039 9.35762 1.94790 2.29202 2.69277 3.15882 3.70002 4.32763 5.05447 5.89509 6.86604 10.76126 2.02582 2.40662 2.85434 3.37993 3.99602 4.71712 5.55992 6.54355 7.68997 12.37545 2.10685 2.52695 3.02560 3.61653 4.31570 5.14166 6.115917.26334 8.61276 14.23177 2.19112 2.65330 3.207143.86968 4.66096 5.60441 6.72750 8.06231 9.64629 16.36654 5% 6% 7% 8% 9% 10% 11% 12% 15% 0 2 4 6 10 12 13 15 16 17 18 19 20 CLOSEExplanation / Answer
Calculation of Present value and profitability of project A
Year
Cash inflow
Value at 9%
Present value
1
70600
.91743
64770.558
2
70600
.84168
59422.608
3
70600
.77218
54515.908
4
70600
.70843
50015.158
5
70600
.64993
45885.058
6
70600
.59627
42096.662
7
70600
.54703
38620.318
8
70600
.50187
35432.022
9
70600
.46042
32505.652
10
70600
.42241
29822.146
11
70600
.38753
27359.618
12
70600
.35553
25100.418
13
70600
.32618
23028.308
14
70600
.29925
21127.05
Total
549701.484
Net Present Value for Project A = $549701.484 – $495478 = 54223.484 or $54223 approx
Profitability Index for Project A = $549701.484 / $495478 = 1.11
Calculation of Present value and profitability of project B
Year
Cash inflow
Value at 9%
Present value
1
48100
.91743
44128.383
2
48100
.84168
40484.808
3
48100
.77218
37141.858
4
48100
.70843
34075.483
5
48100
.64993
31261.633
6
48100
.59627
28680.587
7
48100
.54703
26312.143
8
48100
.50187
24139.947
9
48100
.46042
22146.202
10
48100
.42241
20317.921
11
48100
.38753
18640.193
12
48100
.35553
17100.993
13
48100
.32618
15689.258
14
48100
.29925
14393.925
Total
374513.334
Net Present Value for Project B = $374513.334 – $322565 = 51948.334 or $51948 Approx
Profitability Index for Project B = $374513.334 / $322565 = 1.16
Year
Cash inflow
Value at 9%
Present value
1
70600
.91743
64770.558
2
70600
.84168
59422.608
3
70600
.77218
54515.908
4
70600
.70843
50015.158
5
70600
.64993
45885.058
6
70600
.59627
42096.662
7
70600
.54703
38620.318
8
70600
.50187
35432.022
9
70600
.46042
32505.652
10
70600
.42241
29822.146
11
70600
.38753
27359.618
12
70600
.35553
25100.418
13
70600
.32618
23028.308
14
70600
.29925
21127.05
Total
549701.484
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