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McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years,
McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $70,000. Project B will cost $310,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $55,000. A discount rate of 9% is appropriate for both projects. (a) Compute the net present value and profitability index of each project. (b) Which project should be accepted? Section (a) Project A PV of net annual cash flows PV of salvage Subtotal LESS: Capital Investment NPV Net Present Value Profitability Index = Section (a) Project B PV of net annual cash flows PV of salvage Subtotal LESS: Capital Investment NPV Net Present Value Profitability Index = Cash Flows Discount Factor Present Value x = x = x = x = # Discount Cash Flows Present Value Factor x X X X = 1744 Section (b) which project should be accepts AND WHY?
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