Question

1)McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $489,000, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $71,800. Project B will cost $321,000, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $48,600. A discount rate of 7% is appropriate for both projects. Click here to view the factor 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		$enter a dollar amount rounded to 0 decimal places
Profitability index - Project A		enter the profitability index rounded to 2 decimal places
Net present value - Project B		$enter a dollar amount rounded to 0 decimal places
Profitability index - Project B		enter the profitability index rounded to 2 decimal places

Which project should be accepted based on Net Present Value?

select a project                                                          Project BProject A should be accepted.

Which project should be accepted based on profitability index?

select a project                                                          Project B Project A should be accepted.

2)Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $158,800 and have an estimated useful life of 6 years. It can be sold for $69,100 at the end of that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $26,700. The company’s borrowing rate is 8%. Its cost of capital is 10%.
Click here to view the factor table.

Calculate the net present value of this project to the company and determine whether the project is acceptable. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.)

Net present value

$enter the net present value in dollars rounded to 0 decimal places

3)Kanye Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $179,000, has an estimated useful life of 7 years, a salvage value of zero, and will increase net annual cash flows by $37,987.

Click here to view the factor table.

What is its approximate internal rate of return? (Round answer to 0 decimal place, e.g. 13%.)

Internal rate of return

enter the Internal rate of return in percentages rounded to 0 decimal places %

Answer 1

qns -1
		Project A	Project B
Initial Investment		$              489,000	$        321,000
Net Annual Cash Flows		$                 71,800	$          48,600
PVA FACTOR @ 7% for 11 years	7.4987	7.4987
Present Value of Cash flow	$              538,407	$        364,437
Net Present Value		$                 49,407	$          43,437
Profitability Index		538407/489000	364437/321000
Profitability Index		1.10	1.14
NPV Based -		Project A
Profitability Index Based-	Project B