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

## Question:

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

Become a Study.com member to unlock this answer! Create your account

View this answer**Answer (a)**

**Computation of net present value**

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

Year | PVF @ 8% | Amount |

See full answer below.

#### Ask a question

Our experts can answer your tough homework and study questions.

Ask a question Ask a question#### Search Answers

#### Learn more about this topic:

from

Chapter 3 / Lesson 13Learn about capital budgeting decisions with examples. See different types of capital budgeting techniques, such as payback period and internal rate of return.

#### Related to this 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.
- 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 $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 $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 $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 $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
- 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
- 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
- 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 $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 $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 $ 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 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
- 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
- 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 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
- 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
- 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 with an 8-year life has tangible costs and benefits with a $165,000 negative net present value. The company's discount rate is 9%. What amount of annual cash inflow would have to be provided by the project's intangible benefits for the project t
- The Warren Company is considering investing in two alternative projects: Project 1 Project 2 Investment $700,000 $260,000 Useful life (years) 7 8 Estimated annual net cash inflows for useful life $120,000 $50,000 Residual value $35,000 $16,000 Depreciatio
- 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
- Your company has been presented with an opportunity to invest in a project that is summarized as follows: Investment required $60,000,000 Annual gross income $14,000,000 Annual operating Costs 5,500,000 Salvage Value after 10 years 0 The project is expec
- 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
- 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 $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 $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 $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 $1,077,686, 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
- 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
- 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
- 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
- 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
- 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 $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
- 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
- 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
- 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
- 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
- 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
- A company is considering investment in a project that costs Rs. 200,000. The estimated cash inflow from the project are as follows: Year Cash Inflow Present value factor at 10% 1 70,000 0.909 2 80,000 0.826 3 120,000 0.751 4 90,000 0.683 5 60,000 0.621 Ca
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- Citrus Company is considering a project that has estimated annual net cash flows of $32,000 for 6 years and is estimated to cost $150,000. Citrus's cost of capital is 8%. Determine the net present value of the project. Based on NPV, determine whether the
- Compute the benefit-cost ratio and B-C criterion of the following project: Project cost P80,000 Gross income P25,000 per year Opening cost P6,000 per year Salvage value 0 Life of project 10 years Rate of interest 12%
- 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
- 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
- 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
- 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
- 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
- Natt Company is considering undertaking a project that would yield annual profits (after depreciation) of $68,000 for 5 years. The initial outlay of the project would be $800,000 and the project's assets would have a residual value of $50,000 at the end o
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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 $
- The Warren Company is considering investing in two alternative projects: Project 1 Project 2 Investment $400,000 $250,000 Useful life (years) 5 6 Estimated annual net cash inflows for useful life $100,000 $45,000 Residual value $25,000 $15,000 Depreciatio
- 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
- 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
- A local pest control company has purchased equipment costing $150,000 with an estimated lifetime of 7.5 years using straight line depreciation. Additional fixed costs per year are $100,000. Variable costs per pest control service are $40 and the price per
- Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,560. It will have a useful life of 4 years and no salvage value. Annual revenues would
- 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
- Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $115,400. It will have a useful life of 4 years and no salvage value. Annual cash inflows wo
- Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Leung Company uses the straight-line method of depreciation. Determine the internal rate of return for each project. Rou
- 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
- 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
- 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
- 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
- Project A has a first cost of $3,500, annual operating and maintenance costs of $1,900, annual savings of $2,300, and a salvage value of $1,800 at the end of its 5 year useful life. Project B has a f
- New Hampshire Company is considering two investments. The relevant data follows: Project A Project B Cost $200,000 $300,000 Annual cash savings(end of year) $50,692 $60,995 Terminal salvage value $50,
- 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?
- If a payback period for a project is greater than its expected useful life, the: A. project will always be profitable B. entire initial investment will not be recovered C. project would only be acceptable if the company's cost of capital was low D. projec
- If a payback period for a project is greater than its expected useful life, the: a. project will always be profitable. b. entire initial investment will not be recovered. c. project would only be acceptable if the company's cost of capital was low. d. pro
- 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.
- A machine that costs $100,000 is expected to have a life of 5 years and then a scrap value of $15000. Its expected net returns are year 1, $20,000; year 2, $50,000; year 3, $35,000; year 4, $35,000 and year 5, $35000, and the projects of this type are exp
- A project has estimated annual net cash flows of $96,200 for four years and is estimated to cost $315,500. Assume a minimum acceptable rate of return of 10%. Determine (1) the net present value of the project and (2) the present value index.
- The following data pertain to an investment proposal: Cost of the investment $30,000 Annual cost savings $9,000 Estimated salvage value $4,000 Life of the project 5 years Discount rate 12%
- The following data pertain to an investment proposal: Cost of the investment $34,000 Annual cost savings $10,000 Estimated salvage value $5,000 Life of the project 5 years Discount rate 11% The
- The following data pertain to an investment proposal: | Cost of investment | $52,000 | Annual cost savings | $16,000 | Estimated salvage value | $8,000 | Life of the project | 5 years | Discount rate | 13% The net present value of the proposed investmen
- 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
- 1. Hamell Company has gathered the following data on a proposed investment project: Discount rate 9% Life of the project 9 years Initial investment $410,000 Annual cash flows $81,000 Salvage value 0
- 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
- 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
- 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
- The following data concerns a proposed equipment purchase: Cost $125,000 Salvage value $3,000 Estimated useful life 4 years Annual net cash flows $45,100 Depreciation method Straight-line The annual a
- The following data concerns a proposed equipment purchase: Cost $151,600 Salvage value $4,400 Estimated useful life 4 years Annual net cash flows $46,500 Depreciation method Straight-line The annual a
- Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $129,639. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,100, and annual cash outflows would i