Answered: Allied Biscuit Co. has to choose…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 13P

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Allied Biscuit Co. has to choose between two mutually exclusive projects. If it chooses project A, Allied Biscuit Co. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 12%?

	Cash Flow
Project A		Project B
Year 0:	–$17,500	Year 0:	–$45,000
Year 1:	10,000	Year 1:	10,000
Year 2:	16,000	Year 2:	17,000
Year 3:	15,000	Year 3:	16,000
		Year 4:	15,000
		Year 5:	14,000
		Year 6:	13,000

A. $8,754

B. $12,506

C. $7,504

D. $10,630

E. $11,255

Allied Biscuit Co. is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $45,681. Allied Biscuit Co. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?

$21,124

A. $18,369

B. $15,614

C. $17,451

D. $22,043

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