Brief Exercise 12-5 McKnight Company is considering two different, mutually excl

Question

Brief Exercise 12-5 McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $530,306, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $73,000. Poject B will cost $345,903, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $48,800. A discount rate of 7% is appropriate for both projects. Click eretoview. Pytable. 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. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value - Project A $ Profitability index Project A Net present value Project B Profitability index - Project B Which project should be accepted based on Net Present Value? should be accepted Which project should be accepted based on profitability index? should be accepted

Explanation / Answer

Selection of Project Based on NPV = Project A

Selection of Project Based on Profitability Index = Project B

Project A Project B Initial Investment          5,30,306          3,45,903 Useful Life (Years) 12 12 Annual Cash Inflow             73,000             48,800 PVIFA @ 7% for 12 Years             7.9427             7.9427 PV of Annual Cash Inflows          5,79,816          3,87,603 Net Present Value             49,510             41,700 Profitability Index 1.09 1.12

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