Question

McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Profect A will cost $508,824, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $74,100. Project B will cost $341,779, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $50,700. A discount rate of 8% is appropriate for both projects. 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 s Profitability index Project A et present value-Project B Profitability index Project B Which project should be accepted based on Net Present Value? Project A should be accepted. Which project should be accepted based on profitability index? Project B should be accepted.

Answer 1

	MC Knight Company
	P.v of annuity factor 8% for 12 years=(A)	7.5361
		Project A	Project B
	Cost=(B)	508824	341779
	Expected increase in net annual cash flow=(C )	74100	50700
	P.V of cash flow=(D )=(A)*(C)	$       5,58,425	$       3,82,080
	NPV=Present value of inflow-Present value of outflow
	NPV=(D)-(B)	49601	40301
	Project A should be accepted on the basis of NPV
	Profitability Index=Present value of cash flow/Present value of cash outflow
	P.V of cash flow=(A)	558425.01	382080.27
	P.V of cash outflow=(B)	508824	341779
	Profitability Index=(A)/(B)	1.10	1.12