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. Project B will cost $280,000 , has an expected useful life of 10 years, 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. Compute the net present value and profitability index of each project. Which project should be accepted?
Quillen Company is performing a post audit of a project completed one year ago. Th initial estimates were that 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 year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $260,000, will have a useful life of 11 years and will produce net annual cash flows of $39,000 per year. Evaluate the success of the project. Assume a discount rate of 10%.
Your tutorial is attached and includes instructional notes on profitability index and how to evaluate the projects. The PV of the future cash flows is computed using Excel's PV function.