Question

Creative Furniture is considering two mutually exclusive projects that would automate part of their production facilities. The estimated cash flows associated with each project are below. If a cash flow replication assumption is reasonable and if Creative’s cost of capital is 11%, which project should be chosen?

	Year	Project A	Project B
	0	($12,000)	($12,000)
	1	$4,200	$7,500
	2	$4,200	$7,500
	3	$4,200
	4	$4,200
	NPV	$1,030	?
	EAA	$332	?
	WACC	11%
a.	EAA(B)=$493; therefore choose B
b.	EAA(B)=$262; therefore choose A
c.	NPV(B)=$844; therefore choose A
d.	EAA(B)=$493; therefore choose A
e.	NPV(B)=$844; therefore choose B

Answer 1