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. Project B will cost $337,425, has an expected useful life of 13 years, a salvage value of zero, and is expected to increase net annual cash flows by $49,200. A discount rate of 8% is appropriate for both projects.
a. Compute the net present value and profitability index of each project.
b. Which project should be accepted? (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round computations and final answer for present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50. Round computations for Discount Factor to 5 decimal places. )
Net Present Value:
The net present value is a better technique than other capital budgeting techniques. If different techniques give different results, then the business should go with the net present value technique.
Answer and Explanation: 1
Computation of net present value
|Project A||Project B|
|Year||PVF @ 8%||Amount...|
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fromChapter 3 / Lesson 13
Learn about capital budgeting decisions with examples. See different types of capital budgeting techniques, such as payback period and internal rate of return.