Crockett Graphic Designs Inc. is considering two mutually exclusiveprojects. Both projects require an initial investment of $11,000 and are typical average-riskprojects for the firm. Project A has an expected life of 2 years with after-tax cash inflows of$8,000 and $10,000 at the end of Years 1 and 2, respectively. Project B has an expected lifeof 4 years with after-tax cash inflows of $5,500 at the end of each of the next 4 years. Thefirm’s WACC is 12%.a. If the projects cannot be repeated, which project should be selected if Crockett usesNPV as its criterion for project selection?b. Assume that the projects can be repeated and that there are no anticipated changes inthe cash flows. Use the replacement chain analysis to determine the NPV of the projectselected.c. Make the same assumptions as in part b. Using the equivalent annual annuity (EAA)method, what is the EAA of the project selected?
Crockett Graphic Designs Inc. is considering two mutually exclusive
projects. Both projects require an initial investment of $11,000 and are typical average-risk
projects for the firm. Project A has an expected life of 2 years with after-tax
$8,000 and $10,000 at the end of Years 1 and 2, respectively. Project B has an expected life
of 4 years with after-tax cash inflows of $5,500 at the end of each of the next 4 years. The
firm’s WACC is 12%.
a. If the projects cannot be repeated, which project should be selected if Crockett uses
b. Assume that the projects can be repeated and that there are no anticipated changes in
the cash flows. Use the replacement chain analysis to determine the NPV of the project
selected.
c. Make the same assumptions as in part b. Using the equivalent annual
method, what is the EAA of the project selected?
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