Brief Exercise 24-5 Brief Exercise 24-5 Your answer is partially correct. Try ag
ID: 2595138 • Letter: B
Question
Brief Exercise 24-5
Brief Exercise 24-5
Your answer is partially correct. Try again. 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.Explanation / Answer
Answer:
Net Present Value (NPV) of Project A
NPV = Present Value of Cash Inflow - Present Value of Cash Outflow
= $71,500 (1+10%)11 - $414,927
= $ 464,396.79 - $ 414,927
= $ 49,469.79
Profitability Index of Project A
Profitability Index = (NPV + Initial Investment) / Initial Investment
= ($ 49,469.79 + $ 414,927)/ $ 414,927
= 1.12
Net Present Value of Project B
NPV = $ 52,000 (1 + 10%)11 - $ 294,143
= $ 43,600.12
Profitibility Index of Project B
Profitability Index = ($ 43,600.12 + $ 294,143) / $ 294,143
= 1.15
As per NPV Method Project A should be selected..
As per Profitability Index Project B should be selected.
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