Brief Exercise 24-5 Your answer is partially correct. Try again. Beacon Company

Question

Brief Exercise 24-5 Your answer is partially correct. Try again. Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $507,116, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $71,900. Project B wl cost $346,499, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $51,100. A discount rate of 9% is appropriate for both projects. ick her 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 O decimal places, e.g. 125 and profitability index answers to 2 decimal places, e.g 15.25.) Project A Project B Net present value -75572 39796 Profitability index 0.85 0.88 Which project should be accepted? project B should be accepted

Explanation / Answer

Project A Cash inflow PVF @ 9% Present Value Year 0       (507,116)           1.00 -507,116 Year 1           71,900         0.917      65,963 Year 2           71,900         0.842      60,517 Year 3           71,900         0.772      55,520 Year 4           71,900         0.708      50,936 Year 5           71,900         0.650      46,730 Year 6           71,900         0.596      42,872 Year 7           71,900         0.547      39,332 Year 8           71,900         0.502      36,084 Year 9           71,900         0.460      33,105 Year 10           71,900         0.422      30,371 Year 11           71,900         0.388      27,864 Year 12           71,900         0.356      25,563 Year 13           71,900         0.326      23,452 Year 14           71,900         0.299      21,516 Present value of Project A      52,708 Present value of Inflows    559,824 Profitability Index = $ 559824/507116 = 1.10 Project B Cash inflow PVF @ 9% Present Value Year 0       (346,499)           1.00 -346,499 Year 1           51,100         0.917      46,881 Year 2           51,100         0.842      43,010 Year 3           51,100         0.772      39,459 Year 4           51,100         0.708      36,201 Year 5           51,100         0.650      33,211 Year 6           51,100         0.596      30,469 Year 7           51,100         0.547      27,953 Year 8           51,100         0.502      25,645 Year 9           51,100         0.460      23,528 Year 10           51,100         0.422      21,585 Year 11           51,100         0.388      19,803 Year 12           51,100         0.356      18,168 Year 13           51,100         0.326      16,668 Year 14           51,100         0.299      15,291 Present value of Project B      51,373 Present value of Inflows    397,872 Profitability Index = $ 397872/346499 = 1.15

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