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
Become a Study.com member to unlock this answer! Create your account
View this answerAnswer (a)
Computation of net present value
| Project A | Project B | |||||
|---|---|---|---|---|---|---|
| Year | PVF @ 9% | Amount | ...||||
See full answer below.
Ask a question
Our experts can answer your tough homework and study questions.
Ask a question Ask a questionSearch Answers
Learn more about this topic:
Get access to this video and our entire Q&A library
Profitability Index Method: Definition & Calculations
from
Chapter 14 / Lesson 5
5.3K
The 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.
Related to this Question
- Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $497,202, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $70,700. Pr
- 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, a salvage value of zero, and is expected to increase net annual cash flows by $70,000. Pr
- Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $470,733, has an expected useful life of 13 years, a salvage value of zero, and is e
- Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $495,478, has an expected useful life of 14 years, a salvage value of zero, and is ex
- Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $526,509, has an expected useful life of 13 years, a salvage value of zero, and is ex
- 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, a salvage value of zero, and is ex
- Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $501,261, has an expected useful life of 13 years, a salvage value of zero, and is ex
- Orkin Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $489,272, has an expected useful life of 13 years, a salvage value of zero, and is expected to increase net annual cash flows by $68,600. Pro
- Wales Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $403,010, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $73,830. Pro
- Compute the net present value of each project. Company D is considering two different, mutually exclusive capital expenditure proposals. (a) Project A will cost $395,000, has an expected useful life of 10 years, a salvage value of zero, and is expected t
- 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
- McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $414,927, has an expected useful life of 11 years, a salvage value of zero, and is
- McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $ 506,000, has an expected useful life of 12 years, a salvage value of zero, and is
- McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $523,048, has an expected useful life of 12 years, a salvage value of zero, and is
- McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $542,635, has an expected useful life of 12 years, a salvage value of zero, and is
- A project that costs $80,000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5,000. The project will generate annual cash inflows of $ 21,375. The accounting rate of return is: a. 26.7% b.
- A project has an initial cost of $38,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the proje
- A project has an initial cost of $74,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $3,000, $4,400, $5,000, and $4,500 a year for the
- Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were the project would cost $250,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $46,000 per y
- Stepnoski Corporation is considering a capital budgeting project that would involve investing $216,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of the useful life. Annual incremental sales from the project woul
- A project with a 9-year life has tangible costs and benefits with a $124,000 negative net present value. The company's discount rate is 11%. Required: The amount of annual cash inflow would have to
- A project with a 10-year life has tangible costs and benefits with a $175,000 negative net present value. The company's discount rate is 10% The amount of annual cash inflow would have to be provided
- Sader Corporation is considering a capital budgeting project that would require an investment of $160,000 in equipment with a 4-year expected life and zero salvage value. Annual incremental sales will be $420,000 and annual incremental cash operating expe
- Gutshall Corporation is considering a capital budgeting project that would involve investing $160,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of the useful life. Annual incremental sales from the project would
- The Silverside Company is considering investing in two alternative projects: Project 1 Project 2 Investment $600,000 $280,000 Useful life (years) 9 5 Estimated annual net cash inflows for useful life $120,000 $60,000 Residual value $24,000 $12,000 Depreci
- Cardinal Company is considering a five-year project that would require a $2,975,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 14%. The project would provide net operating income for every
- Folino Corporation is considering a capital budgeting project that would require investing $120,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $380,000 and annual incremental cash operating expe
- Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value. The project would provide net income each year as follows for the life of the project: Sales $500,000 Le
- We are evaluating a project that costs $1,024,344, has a seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected
- We are evaluating a project that costs $756,000, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 6
- We are evaluating a project that costs $1,120,000, has a ten-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at
- We are evaluating a project that costs $972,000, has a four-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at
- We are evaluating a project that costs $1,077,686, has a seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 41,111 units per year. Price per unit is $47, variab
- Jonathon Company is considering an investment in the project below: Project 1 cost $10,000 Annual cash operating savings (end of year) $3,000 Terminal salvage $0 Useful life in years 5 Required rate of return 10% What is the lowest level of annual cash o
- Leamon Corporation is considering a capital budgeting project that would require an investment of $240,000 in equipment with a 4-year useful life and zero salvage value. The annual incremental sales would be $630,000 and the annual incremental cash operat
- Leamon Corporation is considering a capital budgeting project that would require an investment of $200,000 in equipment with a 4-year useful life and zero salvage value. The annual incremental sales would be $640,000 and the annual incremental cash operat
- Leamon Corporation is considering a capital budgeting project that would require an investment of $190,000 in equipment with a 4-year useful life and zero salvage value. The annual incremental sales would be $690,000 and the annual incremental cash operat
- Gutshall Corporation is considering a capital budgeting project that would involve investing $236,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of the usefu
- A project costing $400 is to be depreciated straight-line over the 5-year life of the project to zero salvage value. Net income resulting from the project amounts to $100 years one and two and $150 in years 3 through 5. The project cash flows should be di
- A project requires an investment of $40,000 in equipment. Annual cash flows of $9,000 are expected to occur for the next eight years. No salvage value is expected. the company uses the straight-line method of depreciation. The accounting rate of return f
- A project has a life of 10 years and no salvage value. Your firm uses a MARR of 8% to evaluate projects. The project has uncertain costs and revenue as shown in the table below: Initial Cost Probabil
- Inocencio Corporation has provided the following information concerning a capital budgeting project: Tax rate 35% Expected life of the project 4 Investment required in equipment $270,000 Salvage value of equipment $0 Annual sales $755,000 Annual cash oper
- Slick Company is considering a capital project involving a $225,000 investment in machinery and a $45,000 investment in working capital. The machine has an expected useful life of 10 years and no salvage value. The annual cash inflows (before taxes) are e
- Williams Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year Net income Net Cash f
- Trinitron Enterprises is considering a project that requires an initial investment of $216,000 with an estimated useful life of 10 years and no salvage value. The project will generate $7,200 of net income each year. The asset will be depreciated using st
- The following data on a proposed investment project has been provided: Cost of equipment $50,000 Working capital required $30,000 Salvage value of equipment $0 Annual cash inflows from the project $20,000 Required rate of return 20% Life of the project 8
- Colin's Haberdashery Products is considering a project that would have an initial cost of $285,000 and a 4-year life. The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. Projected ca
- Erling Corporation has provided the following information concerning a capital budgeting project: Investment required in equipment $280,000 Expected life of the project 4 Salvage value of equipment $0 Annual sales $720,000 Annual cash operating expens
- Oriental Company has gathered the following data on a proposed investment project: Investment in depreciable equipment $600,000 Annual net cash flows $50,000 Life of the equipment 20 years Salvage value $0 Discount rate 14.00% The company uses straight-li
- Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $250,000, would have a useful life of 9 years, zero salvage value
- Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $235,455, would have a useful life of 9 years, zero salvage value
- Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $241,582, would have a useful life of 9 years, zero salvage value
- Cardinal Company is considering a five-year project that would require a $2,955,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 18%. The project would provide net operating income in each o
- Oriental Corporation has gathered the following data on a proposed investment project: Investment in depreciable equipment $450,000; Annual net cash flows $90,000; Life of the equipment 10 years; Salvage value $0; Discount rate 7%. The company uses straig
- The project will cost $990,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 320 units per year; the price per unit will be $19,400, the variable cost per unit will be $15,900, and the fix
- Thornley Machines is considering a 3-year project with an initial cost for fixed assets of $618,000. The project will reduce operating costs by $265,000 a year. The equipment will be depreciated straight-line to a zero book value over the life of the proj
- A company purchased a plant asset for $55,000. The asset has an estimated salvage value of $12,000, and an estimated useful life of 10 years. What is the annual depreciation expense using the double declining method?
- The project will cost $990,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 320 units per year; price per unit will be $19,400, vari
- Nakama Corporation is considering investing in a project that would have a 4-year expected useful life. The company would need to invest $160,000 in equipment that will have zero salvage value at the end of the project. Annual incremental sales would be $
- Way Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows woul
- A project has a 7 year life and costs $400,000. Depreciation is straight line to zero over the life of the project and there is no salvage value. The tax rate is 30% and a 12% return on this project. Sales are expected to be 75,000 units per year. If the
- June Co. is evaluating a project requiring a capital expenditure of $620,000. The project has an estimated life for four years and no salvage value. The estimated net income and net cash flow from the
- Dartis Company is considering investing in a specialized equipment costing $600,000. The equipment has a useful life of 5 years and a residual value of $60,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from
- The following data pertain to an investment proposal: Cost of the investment $58,000 Annual cost savings $16,000 Estimated salvage value $8,000 Life of the project 5 years Discount rate 11% The net present value of the proposed investment is closest to: A
- U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows: Depreciation is computed by the straight-line method with no salvage value. The company's
- X Company is thinking about adding a new product line. it is expected that: Initial cost $2,780,000 Annual cash inflow $2,540,000 Annual cash outflows $2,260,000 Estimated useful life 10 years Salvage value $4,400,000 Discount rate 8% Calculate the net pr
- Your Hair Rocks is considering a capital budgeting project. This project will initially require a $32,000 investment in equipment and a $4,000 working capital investment. The useful life of this project is 5 years with an expected salvage value of zero on
- The following data pertain to an investment proposal: Cost of the investment $58,000 Annual cost savings $16,000 Estimated salvage value $8,000 Life of the project 5 years Discount rate 11% The net present value of the proposed investment is: A. $34,000
- Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,000, and annual cash outflows would
- Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $119,200. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,240, and annual cash outflows would
- Boulder Milling is evaluating a proposal to invest in a new piece of equipment costing $100,000 with the following annual cash flows over the equipment's 4-year useful life: Cash revenues $120,000 Cash expenses (64,000) Depreciation expenses (straight-li
- Boulder Milling is evaluating a proposal to invest in a new piece of equipment costing $110,000 with the following annual cash flows over the equipment's 4-year useful life: Cash revenues: $95,000 Cash expenses: $(52,000) Depreciation expenses (straight-l
- Valesano Company is considering a project with the following information: Project 1 Cost $4,000 Annual cash operating savings (end of year) $2,000 Terminal salvage $0 Useful life in years 3 Required r
- The following data concerns a proposed equipment purchase: Cost $144,000, Salvage value $4,000, Estimated useful life 4 years, Annual net cash flows $46,100, Depreciation method Straight-line. Assuming that net cash flows are received evenly throughout th
- A project has a one year life. It has an outlay of $1500 million. At the end of year 1, the new inflow is likely to be $2200 million. The pretax cost of debt is 11%, the cost of equity is 19% and the
- Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project's life are: | Year | Net Annual Cash Flow | 1 | $3,000 | 2 | 8,000 | 3 | 15,000 | 4 | 9,000 The cash payback period is _
- Brady Corp. is considering the purchase of a piece of equipment that costs $23,000. Projected net annual cash flows over the project's life are: Year Net Annual Cash Flow 1 $3,000 2 8,000 3 15,000 4 9,000 The cash payback period is __________.
- Pattis Project has a first cost of P, annual savings A, and a salvage value of 1,000 at the end of the 10-year service life. She has calculated the present worth as 20,000, the annual worth as 4,000 a
- A firm is considering two alternatives: A B Initial Cost $10,700 $5,500 Uniform Annual Benefits 2,100 1,800 Salvage value at end of useful life 0 0 Useful life, in years 8 4 At the end of 4 years, an
- A project requires an immediate investment of $64,726 in some new equipment with an estimated useful life of 10 years and no salvage value. If predicted annual savings or cash operating expenses are $11,213, what is the accounting rate of return based on
- A project requires an immediate investment of $68,629 in some new equipment with an estimated useful life of 10 years and no salvage value. If predicted annual savings or cash operating expenses are $14,555, what is the accounting rate of return based on
- Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes.) Investment required in equipment $620,000 Annual cash inflows $86,000 Salvage value $0 Life of
- Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes.) Investment required in equipment $570,000 Annual cash inflows $84,000 Salvage value $0 Life of
- A project is expected to produce cash flows of $48,000, $39,000, and $15,000 over the next three years, respectively. After three years, the project will be worthless. What is the present value of this project if the applicable discount rate is 15.25 perc
- On 1/1, a company buys equipment with a cost of $7,900, an estimated salvage value of $1,000, and an estimated useful life of 4 years. Using the double declining balance method of depreciation, calculate accumulated depreciation after year 2.
- On 1/1, a company buys equipment with a cost of $25,900, an estimated salvage value of $1,500, and an estimated useful life of 10 years. Using the double declining balance method of depreciation, calculate accumulated depreciation after year 1.
- Rodriguez Inc. is considering a project that costs $200,000. The company expects the annual cash revenues to be $75,000 and annual expenses (including depreciation) to be $30,000. The project has a ten-year useful life and a residual value of $25,000. Ass
- The following data pertain to an investment proposal: Cost of the investment $70,000 Annual cost savings $20,000 Estimated salvage value $8,000 Life of the project 5 years Discount rate 12% The net present value of the proposed investment is closest to:
- Hothan Corporation has provided the following information concerning a capital budgeting project: Investment required in equipment $240,000 Expected life of project 4 Salvage value of equipment $0
- Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment required in equipment $30,000 Annual cash inflows $6,000 Salvage value of equipment $0 Life of the investment 15years Required rate of r
- Beacon Company is considering purchasing new equipment for $355,950. The equipment has a 5-year useful life, and depreciation would be $71,190 (assuming straight-line depreciation and zero salvage value). The purchase of the equipment should increase net
- A project has estimated annual net cash flows of $8,000 for five years and is estimated to cost $28,000. Assume a minimum acceptable rate of return of 12%. Determine (1) the net present value of the project and (2) the present value index.
- 1. Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects: Project A ; Project B ; Useful Life - 5 years ; 5 years ; Present Value of Ca
- A company buys a piece of equipment for $60,000. The equipment has a useful life of six years. No residual value is expected at the end of useful life. Using the double-declining-balance method, what is the company's depreciation expense in the first year
- Cardinal Company is considering a five-year project that would require a $3,025,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 16%. T
- Cardinal Company is considering a five-year project that would require a $2,750,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 18%. T
- Cardinal Company is considering a five-year project that would require a $2.915,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 16%. T
- Cardinal Company is considering a five year project that would require a $2,500,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 12%. T
- Cardinal Company is considering a five-year project that would require a $2,945,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 18%. T
- Cardinal Company is considering a five-year project that would require a $2,765,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 14%.
Explore our homework questions and answers library
Browse
by subject