19. Consider the following two projects with a cost of capital of 15%. Only one can be chosen. Project A: Immediate investment of $550,000; profits starting at $75,000 in the first year and rising by $25,000 for the next six years followed by decreasing profits of $25,000 per year in the subsequent seven years; costs of $50,000 at the beginning of years 4, 10, and 14. a. b. Project B: Immediate investment of $800,000; profits starting at $200,000 and rising by $50,000 for the next three years followed by decreasing profits of $75,000 per year in the subsequent four years; costs of $110,000 at the beginning of the fourth and seventh years. Calculate the equivalent annual cash flow for each project and recommend which project should be chosen. What annual benefit will be realized over the alternative project?

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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19. Consider the following two projects with a cost of capital of 15%. Only one can be chosen.
Project A: Immediate investment of $550,000; profits starting at $75,000 in the first year and rising by $25,000 for the
next six years followed by decreasing profits of $25,000 per year in the subsequent seven years; costs of $50,000 at
the beginning of years 4, 10, and 14.
Project B: Immediate investment of $800,000; profits starting at $200,000 and rising by $50,000 for the next three
years followed by decreasing profits of $75,000 per year in the subsequent four years; costs of $110,000 at the
beginning of the fourth and seventh years.
a.
Calculate the equivalent annual cash flow for each project and recommend which project should be chosen.
b. What annual benefit will be realized over the alternative project?
Transcribed Image Text:19. Consider the following two projects with a cost of capital of 15%. Only one can be chosen. Project A: Immediate investment of $550,000; profits starting at $75,000 in the first year and rising by $25,000 for the next six years followed by decreasing profits of $25,000 per year in the subsequent seven years; costs of $50,000 at the beginning of years 4, 10, and 14. Project B: Immediate investment of $800,000; profits starting at $200,000 and rising by $50,000 for the next three years followed by decreasing profits of $75,000 per year in the subsequent four years; costs of $110,000 at the beginning of the fourth and seventh years. a. Calculate the equivalent annual cash flow for each project and recommend which project should be chosen. b. What annual benefit will be realized over the alternative project?
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