Question

Current Attempt in Progress 

McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $519.277, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $71,600. Project B will cost $367,031, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $51,800. Aytiscount rate of 7% is appropriate for both projects. Click here to view PV table.

Answer 1

PVA _{7 %, n=12} = [ { 1 - ( 1 / 1+ r ) ⁿ } / r ] = [ { 1 - ( 1 / 1.07 ) ¹² } / 0.07 ] = 7.9427

NPV of Project A = 71,600 x 7.9427 - 519,277 = 49,420.32

NPV of Project B = 51,800 x 7.9427 - 367,031 = 44,400.86

Both the projects are investment worthy since each has a positive NPV. But as the projects are mutually exclusive,obly one of the projects can be selected and the company should invest in Project A, as it has a higher NPV.