Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and repeatable. Year                           0                1                2                3                4 CFS                          -$900         $800          $600                  CFL                          -$700         $300          $200          $400          $200 WACC: 10% Given the two projects are of different length and both are repeatable, one suggestion is to use the replacement chain approach in evaluation. If this approach is used, which project will you choose? Show the calculations and explain your decision.

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and repeatable.

Year                           0                1                2                3                4

CFS                          -$900         $800          $600                 

CFL                          -$700         $300          $200          $400          $200

WACC: 10%

Given the two projects are of different length and both are repeatable, one suggestion is to use the replacement chain approach in evaluation. If this approach is used, which project will you choose? Show the calculations and explain your decision.

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