Question

Brief Exercise 12-5

McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $494,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $68,400. Project B will cost $331,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $47,000. A discount rate of 7% 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 BProject A should be accepted.

Answer 1