a company is considering 2 mutually exclusive projects. project A has an initial
ID: 2751458 • Letter: A
Question
a company is considering 2 mutually exclusive projects. project A has an initial cost of $80,000 (CFo = -80,000) and produces cash inflows of $38,000 a year at the end of each of the next 6 years. Project B has an initial cost of $60,000 (CFo = -60000) and produces cash inflows of $30000 a year at the end of the next 3 years. After 3 years, project B can be repeated for one more time. the company's cost of capital is 10%. which project should the company take?
1. use the replacement chain approach
2. use the equivalent annual annuity analysis
Explanation / Answer
Answer: Replacement chain
It indicates that PRoject A should be accepted because it has highest NPV and IRR.
2. use the equivalent annual annuity analysis:
Project A=85497.6/4.3552=19631
Project B=14601/2.4867=5871.6
So Project A should be accepted because it has highest Equivalent annual annuity.
Project A Particulars 0 1 2 3 4 5 6 Intial cost -80000 Cash flows 38000 38000 38000 38000 38000 38000 Total cash flows -80000 38000 38000 38000 38000 38000 38000 Discount Factor 10% 1 0.909 0.8264 0.7513 0.683 0.621 0.5645 PV ($) -80000 34542 31403.2 28549.4 25954 23598 21451 NPV 85497.6 IRR 42%Related Questions
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