Smith and Co. has to choose between two mutually exclusive projects. If it chooses project A, Smith and 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 10%? Cash Flow Project A Project B Year 0: –$17,500 Year 0: –$40,000 Year 1: 10,000 Year 1: 8,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 12,000 Year 5: 11,000 Year 6: 10,000 $15,731 $11,012 $12,585 $9,439 $14,158 Smith and Co. is considering a three-year project that has a weighted average cost of capital of 11% and a NPV of $22,870. Smith and Co. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? $9,359 $10,295 $8,891 $11,231 $7,955
Smith and Co. has to choose between two mutually exclusive projects. If it chooses project A, Smith and 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 10%? Cash Flow Project A Project B Year 0: –$17,500 Year 0: –$40,000 Year 1: 10,000 Year 1: 8,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 12,000 Year 5: 11,000 Year 6: 10,000 $15,731 $11,012 $12,585 $9,439 $14,158 Smith and Co. is considering a three-year project that has a weighted average cost of capital of 11% and a NPV of $22,870. Smith and Co. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? $9,359 $10,295 $8,891 $11,231 $7,955
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter8: Cost Analysis
Section: Chapter Questions
Problem 7E
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Question
Smith and Co. has to choose between two mutually exclusive projects. If it chooses project A, Smith and 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 10%?
|
Cash Flow
|
|
|
---|---|---|---|
Project A | Project B | ||
Year 0: | –$17,500 | Year 0: | –$40,000 |
Year 1: | 10,000 | Year 1: | 8,000 |
Year 2: | 16,000 | Year 2: | 16,000 |
Year 3: | 15,000 | Year 3: | 15,000 |
Year 4: | 12,000 | ||
Year 5: | 11,000 | ||
Year 6: | 10,000 |
$15,731
$11,012
$12,585
$9,439
$14,158
Smith and Co. is considering a three-year project that has a weighted average cost of capital of 11% and a NPV of $22,870. Smith and Co. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?
$9,359
$10,295
$8,891
$11,231
$7,955
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