Corcoran Consulting is deciding which of two computer systems to purchase. It ca

Question

Corcoran Consulting is deciding which of two computer systems to purchase. It can purchase state-of-the-art equipment (System A) for $20,000, which will generate cash flows of $5,000 at the end of each of the next 6 years. Alternatively, the company can spend $10,000 for equipment that can be used for 3 years and will generate cash flows of $5,000 at the end of each year (System B).

a. If the company's WACC is 10% and both projects can be repeated indefinitely, which system should be chosen?
System -Select-AB Item 1 should be chosen.

b. What is its EAA? Round your answer to the nearest cent.

Explanation / Answer

First , solve for each Project’s NPV

Project A : CF0 =-20000 , CF1 = 5000 , Nj = 6 , I/Yr = 10 , solve for NPV = 1776.3

Project A : CF0 =-10000 , CF1 = 5000 , Nj = 3 , I/Yr = 10 , solve for NPV = 2434.26

The Appropriate EAAs are

Project A : N=6 , I/Yr = 10 , PV =-1776.3 , FV=0 solve for PMT = 407.85

Project B : N= 3 , I/Yr = 10 , PV =-2434.26 , FV=0 solve for PMT = 978.85

Choose project B , whose EAAs= 978.85

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.