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 $501,797, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $71,200. Project B will cost $341,812, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $50,400. 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?

Project A Project B Net present value $

$

Profitability index

Explanation / Answer

              

Since NPV is positive any project can be accepted, by NPV project A should be accepted,

By Profitability index Project B should be accepted.

Project B has to be accepted as initial investment is low and return is also very near to project A by NPV, with profitability index , B is better than A.

years particulars project A project B dic.fac 9% disc. Amount project A Project B to investment 501797 341812 1 501797 341812 T1 to T14 71200 50400 7.786 554363.2 392414.4 NPV 52566.2 50602.4 profitability index = present value of cash inflows / Present value of cash outflow profitability index 1.104755907 1.148042

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