Beacon Company is considering two different, mutually exclusive capital expendit
ID: 2491941 • Letter: B
Question
Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $470,733, has an expected useful life of 13 years, a salvage value of zero, and is expected to increase net annual cash flows by $74,000. Project B will cost $279,019, has an expected useful life of 13 years, a salvage value of zero, and is expected to increase net annual cash flows by $46,100. A discount rate of 10% 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
Annuity value for 13 years @10% = 7.103356
Net present value of project A = Sum of PV of cash inflows - Cash outflows
= $74000 * 7.103356 - $470,733
= $54,915.34
Profitability Index of project A= PV of cash intlows/Initial investment
= $74000 * 7.103356/$470,733
= 1.12
Net present value of project B = Sum of PV of cash inflows - cash outflows
= $46100 * 7.103356 - $279,019
= $48,445.71
Profitability Index of project B= PV of cash intlows/Initial investment
= $46100 * 7.103356/$279019
= 1.17
Net present value of project A is greater than net present value of project B. Hence, project A should be accepted.
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