Question

1. McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $543,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $74,600. Project B will cost $319,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $45,600. 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 AProject B should be accepted.

2. Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $134,020 and will increase annual expenses by $73,000 including depreciation. The oil well will cost $442,000 and will have a $10,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 13%.)

Annual rate of return

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

3. Ranger Corporation has decided to invest in renewable energy sources to meet part of its energy needs for production. It is considering solar power versus wind power. After considering cost savings as well as incremental revenues from selling excess electricity into the power grid, it has determined the following.

		Solar		Wind
Present value of annual cash flows		$51,570		$128,658
Initial investment		$38,200		$104,600

Determine 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.)

		Solar		Wind
Net present value		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places
Profitability index		enter the profitability index rounded to 2 decimal places		enter the profitability index rounded to 2 decimal places

Which energy source should it choose?

The company should choose select an option                                                          solarwind energy source.

Answer 1

1

Project A Initial outlay = 543,000

Life = 12 years

Scrap value = 0

Annual cash flow = 74600

Project B initial outlay = 319,000

Life = 12 years

Scrap value = 0

Annual cashflow =45,600

Discount Rate = 7%

Present value(PV) = Value/(1+R)^n

Year	Project A	PV of Project A cashflows	Project B	PV of Project B cashflows
1	74600	69720	45600	42617
2	74600	65159	45600	39829
3	74600	60896	45600	37223
4	74600	56912	45600	34788
5	74600	53189	45600	32512
6	74600	49709	45600	30385
7	74600	46457	45600	28397
8	74600	43418	45600	26540
9	74600	40577	45600	24803
10	74600	37923	45600	23181
11	74600	35442	45600	21664
12	74600	33123	45600	20247
Total		592524		362186

Net Assets Value = Present vaue of Total cash inflows - Present value of initial outlay
Project A's NAV    =	592524 - 543000
=	49,524
Project B's NAV   =	362186 - 319000
=	43,186
As Project A's NAV is higer, Project A should be selected as per NAV.
Profitability Index = PVCI/PVCO
Project A's PI        =	592524/543000
=	1.09
Project B's PI        =	362186/319000
	1.14
As Project B's PI is higher, Project B should be selected as per PI.
2
Cost = 442,000
Annual increased revenue               =	1,34,020
Annual Increased Expenses =	73,000
Annual Increased Profit =	134020 - 73000 = 61,020
Scrap value =	10000
Last year's revenue =    Last years profit =	144020 71020
Average profit of the new unit =	(61020 x 9) +71020 /10
	62020
Annual rate of return =	average annual profit / initial investment x 100
3	14.03%
	Solar	Wind
Present value of cash flow	51570	128658
Initial Investment	38200	104600
Solar Project's NAV                     =	51570 - 38200
=	13,370
Solar Project's PI                          =	51570/38200
=	1.35
Wind Project's NAV                     =	128658 -104600
	24,058
Wind Projects PI                           =	128658/104600
	1.23
According to NAV Wind project will be selcted but according to PI Solar project will be selected.

Please like the solution if satisfied and drop a comment in case of any doubts.

Thankyou