The Smith Pie Company is considering two mutually exclusive investments that wou

Question

The Smith Pie Company is considering two mutually exclusive investments that would increase its capacity to make strawberry tarts. The firm uses a 12 percent cost of capital to evaluate potential investments. The two projects have the following costs and cash flows streams: Alternative A Year 0 $-30,000 1 $10,500 2 $10,500 3 $10,500 4 $10,500 Alternative B Year 0 $-30,000 1 $6,500 2 $6,500 3 $6,500 4 $6,500 5 $6,500 6 $6,500 7 $6,500 8 $6,500. Use the annual equivalent annual annuity method to solve.

Explanation / Answer

Discount rate 12% Alternative A Year 0 1 2 3 4 -30000 10500 10500 10500 10500 -30000 9375 8370.536 7473.693 6672.94 NPV 1892.168 Equivalent annual annuity 622.97 Alternative B Year 0 1 2 3 4 5 6 7 8 -30000 6500 6500 6500 6500 6500 6500 6500 6500 -30000 5803.571 5181.76 4626.572 4130.868 3688.275 3293.102 2940.27 2625.241 NPV 2289.658 Equivalent annual annuity 460.9 Alternative A is better Equivalent annual annuity is computed using FV=0, PV as NPV,,YIELD = 12%,N= PERIOD(4 or 8),coupon is the required answer

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