Use the data below for problems 6 to 10. YearProj YProj Z 0($420,000)($420,000) 1400,000182,000 2185,000156,000 3—146,000 4—175,000 The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have an 11% cost of capital. 6. What is each project’s initial NPV without replication? 7. What is each project’s equivalent annual annuity? 8. Now apply the replacement chain approach to determine the shorter projects’ extended NPV. Which project should be chosen? 9. Now assume that the cost to replicate Project Y in 2 years will increase to $600,000 because of inflationary pressures. How should the analysis be handled now, and which project should be chosen?
Use the data below for problems 6 to 10.
Year
Proj Y
Proj Z
0
($420,000)
($420,000)
1
400,000
182,000
2
185,000
156,000
3
—
146,000
4
—
175,000
The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have an 11% cost of capital.
6. What is each project’s initial
7. What is each project’s equivalent annual
8. Now apply the replacement chain approach to determine the shorter projects’ extended NPV. Which project should be chosen?
9. Now assume that the cost to replicate Project Y in 2 years will increase to $600,000 because of inflationary pressures. How should the analysis be handled now, and which project should be chosen?
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