Brief Exercise 24-5 Open Show Work Brief Exercise 24-5 McKnight Company is consi
ID: 2586718 • Letter: B
Question
Brief Exercise 24-5
Open Show Work
Brief Exercise 24-5
McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $414,927, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $71,500. Project B will cost $294,143, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $52,000. A discount rate of 10% 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?
Project AProject B
should be accepted.Which project should be accepted based on profitability index?
Project AProject B
should be accepted. Click if you would like to Show Work for this question:Open Show Work
Explanation / Answer
Project A:
Year
Cash Flow
PV Factor Formula
PV Factor @ 10%
PV
0
$ (414,927)
1/(1+0.10)^0
1.00000
$ (414,927.00)
1
$ 71,500
1/(1+0.10)^1
0.90909
$ 65,000.00
2
$ 71,500
1/(1+0.10)^2
0.82645
$ 59,090.91
3
$ 71,500
1/(1+0.10)^3
0.75131
$ 53,719.01
4
$ 71,500
1/(1+0.10)^4
0.68301
$ 48,835.46
5
$ 71,500
1/(1+0.10)^5
0.62092
$ 44,395.87
6
$ 71,500
1/(1+0.10)^6
0.56447
$ 40,359.89
7
$ 71,500
1/(1+0.10)^7
0.51316
$ 36,690.81
8
$ 71,500
1/(1+0.10)^8
0.46651
$ 33,355.28
9
$ 71,500
1/(1+0.10)^9
0.42410
$ 30,322.98
10
$ 71,500
1/(1+0.10)^10
0.38554
$ 27,566.35
11
$ 71,500
1/(1+0.10)^11
0.35049
$ 25,060.31
NPV
$ 49,469.86
Profitability index = Sum of PV of positive cash flows / Initial investment
= $ 464,396.86 /$ 414,927 = 1.12
Project B:
Year
Cash Flow
PV Factor Formula
PV Factor @ 10%
PV
0
$ (294,143)
1/(1+0.10)^0
1.00000
$ (294,143.00)
1
$ 52,000
1/(1+0.10)^1
0.90909
$ 47,272.73
2
$ 52,000
1/(1+0.10)^2
0.82645
$ 42,975.21
3
$ 52,000
1/(1+0.10)^3
0.75131
$ 39,068.37
4
$ 52,000
1/(1+0.10)^4
0.68301
$ 35,516.70
5
$ 52,000
1/(1+0.10)^5
0.62092
$ 32,287.91
6
$ 52,000
1/(1+0.10)^6
0.56447
$ 29,352.64
7
$ 52,000
1/(1+0.10)^7
0.51316
$ 26,684.22
8
$ 52,000
1/(1+0.10)^8
0.46651
$ 24,258.38
9
$ 52,000
1/(1+0.10)^9
0.42410
$ 22,053.08
10
$ 52,000
1/(1+0.10)^10
0.38554
$ 20,048.25
11
$ 52,000
1/(1+0.10)^11
0.35049
$ 18,225.68
NPV
$ 43,600.17
Profitability index = Sum of PV of positive cash flows / Initial investment
= $ 337,743.17/$ 294,143 = 1.15
Answer:
Net Present Value-Project A
$ 49,470
Profitability Index-Project A
1.12
Net Present Value-Project B
$ 43,600
Profitability Index-Project B
1.15
Project A should be accepted based on NPV.
Project B should be accepted based on Profitability Index.
Year
Cash Flow
PV Factor Formula
PV Factor @ 10%
PV
0
$ (414,927)
1/(1+0.10)^0
1.00000
$ (414,927.00)
1
$ 71,500
1/(1+0.10)^1
0.90909
$ 65,000.00
2
$ 71,500
1/(1+0.10)^2
0.82645
$ 59,090.91
3
$ 71,500
1/(1+0.10)^3
0.75131
$ 53,719.01
4
$ 71,500
1/(1+0.10)^4
0.68301
$ 48,835.46
5
$ 71,500
1/(1+0.10)^5
0.62092
$ 44,395.87
6
$ 71,500
1/(1+0.10)^6
0.56447
$ 40,359.89
7
$ 71,500
1/(1+0.10)^7
0.51316
$ 36,690.81
8
$ 71,500
1/(1+0.10)^8
0.46651
$ 33,355.28
9
$ 71,500
1/(1+0.10)^9
0.42410
$ 30,322.98
10
$ 71,500
1/(1+0.10)^10
0.38554
$ 27,566.35
11
$ 71,500
1/(1+0.10)^11
0.35049
$ 25,060.31
NPV
$ 49,469.86
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