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Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects...

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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Answer #1

Please refer to the image below for the solution. The WACC is used to discount the two projects to find their NPVs.

Please let me know in the comment section below if you have questions.

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