Question

Consider the case of Blue Hamster Manufacturing Inc.:

Blue Hamster Manufacturing Inc. has to choose between two mutually exclusive projects. If it chooses project A, Blue Hamster 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:

Cash Flows
Project A		Project B
Year 0:	–$10,000	Year 0:	–$40,000
Year 1:	7,000	Year 1:	8,000
Year 2:	15,000	Year 2:	16,000
Year 3:	14,000	Year 3:	15,000
		Year 4:	12,000
		Year 5:	11,000
		Year 6:	10,000

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%?

$12,959

$19,439

$21,599

$16,199

Blue Hamster Manufacturing Inc. is considering a four-year project that has a weighted average cost of capital of 12% and a NPV of $-1,799. Blue Hamster can replicate this project indefinitely. The equivalent annual annuity (EAA) for this project is ______ .

A: $-503

B -622

C: -710

D: -592

Answer 1