# Beacon Company is considering two different mutually exclusive capital expenditure proposals....

## Question:

Beacon Company is considering two different mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years, has a salvage value of zero, and is expected to increase net annual cash flows by $70,000. Project B will cost $280,000, has an expected useful life of 10 years, has a salvage value of zero, and is expected to increase net annual cash flows by $50,000. 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?

## Profitability Index:

The profitability index is the present value of cash inflows divided by the present value of cash outflows. A project is acceptable if the profitability index is more than 1.

## Answer and Explanation: 1

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View this answer**Answer (a)**

**Computation of net present value**

Project A | Project B | |||||
---|---|---|---|---|---|---|

Year | PVF @ 9% | Amount |

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Chapter 14 / Lesson 5The profitability index method measures the acceptability of a project through the ratio of the projected cash inflow to the initial investment. Learn about the definition and calculation of profitability index and understand how to interpret its results.

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