Your answer is partially correct. Try again. McKnight Company is considering two
ID: 2548610 • Letter: Y
Question
Your answer is partially correct. Try again. McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $458,547, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $74,600. Project B will cost $273,500, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $46,200. A discount rate of 9% is appropriate for both projects. Click here to view PV table. 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. 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? 4457.90 1.01 13240.30 1.05 Project A should be accepted. Which project should be accepted based on profitability index?Explanation / Answer
Answer a.
Project A:
Cost = $458,547
Useful Life = 11 years
Incremental Net Cash Flow = $74,600
Present Value of Cash Inflows = $74,600 * PVIFA(9%, 11)
Present Value of Cash Inflows = $74,600 * 6.80519
Present Value of Cash Inflows = $507,667
Present Value of Cash Outflow = $458,547
NPV = Present Value of Cash Inflows - Present Value of Cash Outflow
NPV = $507,667 - $458,547
NPV = $49,120
Profitability Index = Present Value of Cash Inflows / Present Value of Cash Outflow
Profitability Index = $507,667 / $458,547
Profitability Index = 1.11
Project B:
Cost = $273,500
Useful Life = 11 years
Incremental Net Cash Flow = $46,200
Present Value of Cash Inflows = $46,200 * PVIFA(9%, 11)
Present Value of Cash Inflows = $46,200 * 6.80519
Present Value of Cash Inflows = $314,400
Present Value of Cash Outflow = $273,500
NPV = Present Value of Cash Inflows - Present Value of Cash Outflow
NPV = $314,400 - $273,500
NPV = $40,900
Profitability Index = Present Value of Cash Inflows / Present Value of Cash Outflow
Profitability Index = $314,400 / $273,500
Profitability Index = 1.15
Answer b.
Project A should be selected on the basis of NPV.
Answer c.
Project B should be selected on the basis of Profitability Index.
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