Question

McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $593,000, has an expected useful life of 15 years, a salvage value of zero, and is expected to increase net annual cash flows by $75,000. Project B will cost $397,000, has an expected useful life of 15 years, a salvage value of zero, and is expected to increase net annual cash flows by $51,400. A discount rate of 8% is appropriate for both projects. Click here to view PV 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 $Entry field with incorrect answer Profitability index - Project A Entry field with incorrect answer Net present value - Project B $Entry field with incorrect answer Profitability index - Project B Entry field with incorrect answer

Answer 1

Project A:
Present value of annual cash flows	641961	=75000*8.55948
Less: Investment cost	593000
Net present value - Project A	48961
Present value of annual cash flows	641961
Divide by Investment cost	593000
Profitability index - Project A	1.08
Project B:
Present value of annual cash flows	439957	=51400*8.55948
Less: Investment cost	397000
Net present value - Project B	42957
Present value of annual cash flows	439957
Divide by Investment cost	397000
Profitability index - Project B	1.11