Question

Konyvkiado Inc. is considering two mutually exclusive projects. Both require an initial investment of $15,000 at...

Konyvkiado Inc. is considering two mutually exclusive projects. Both require an initial investment of $15,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $7,000 and $12,000 at the end of Years 1 and 2, respectively. In addition, Project S can be repeated at the end of Year 2 with no changes in its cash flows. Project L has an expected life of 4 years and a cash-flow of $5200/year. Each project has a WACC of 9%. What is the equivalent annual annuity of the most profitable project?

Homework Answers

Answer #1

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

Using replacement method for project S;

Rate 9.00%
Year Cashflow (S) Discount rate = 1/(1+r)^(n) Present value of cashflow = A*discount rate Cashflow (L) Present Value = B*discount rate
0 -15000.00 1.0000 -15000.00 -15000.00 -15000.00
1 7000.00 0.9174 6422.02 5200.00 4770.64
2 -3000.00 0.8417 -2525.04 5200.00 4376.74
3 7000.00 0.7722 5405.28 5200.00 4015.35
4 12000.00 0.7084 8501.10 5200.00 3683.81
NPV 2803.37 NPV 1846.54

Project S is more profitable.

Formula for calculation of equivalent annual annuity is:

C = r*NPV/(1-(1+r)^-n)

C = 0.09*2803.37/(1-(1+0.09)^-4) = $865.31

Equivalent annual annuity = $865.31

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $15,000 at...
Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $15,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $7,000 and $12,000 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years with after-tax cash inflows of $5,200 at the end of each of the next 4 years. Each project has a WACC of 9.00%, and neither can...
Haley’s Crockett Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment...
Haley’s Crockett Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $11,000 and are typical average-risk projects for the firm. Project A has an expected life of 2 years with after-tax cash inflows of $8,000 and $10,000 at the end of Years 1 and 2, respectively. Project B has an expected life of 4 years with after-tax cash inflows of $8,000 at the end of each of the next 4 years. The firm’s WACC...
11-11 CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS $225 $225 $50 $49 Project S costs $15,000, and...
11-11 CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS $225 $225 $50 $49 Project S costs $15,000, and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $37,500, and its expected cash flows would be $11,100 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend? Explain
Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial cash outflow...
Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial cash outflow is $50,000 for each project. Project A results in cash inflows of $15,625 at the end of each of the next five years. Project B results in one cash inflow of $99,500 at the end of the fifth year. The required rate of return of Ace Inc. is 10 percent. Ace Inc. should invest in: a. ​Project B because it has no cash inflows...
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs $15,000 and its expected cash flows would...
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs $15,000 and its expected cash flows would be $6,500 per year for 5 years. Mutually exclusive Project L costs $45,000 and its expected cash flows would be $9,900 per year for 5 years. If both projects have a WACC of 16%, which project would you recommend? Select the correct answer. a. Project S, since the NPVS > NPVL. b. Both Projects S and L, since both projects have NPV's > 0....
Capital budgeting criteria: mutually exclusive projects Project S costs $15,000 and its expected cash flows would...
Capital budgeting criteria: mutually exclusive projects Project S costs $15,000 and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L costs $40,500 and its expected cash flows would be $10,800 per year for 5 years. If both projects have a WACC of 15%, which project would you recommend? Select the correct answer. I. Both Projects S and L, since both projects have NPV's > 0. II. Project L, since the NPVL > NPVS....
Johnson Jets is considering two mutually exclusive projects. Project A has an up-front cost of $124,000...
Johnson Jets is considering two mutually exclusive projects. Project A has an up-front cost of $124,000 (CF0 = -124,000), and produces positive after-tax cash inflows of $30,000 a year at the end of each of the next six years. Project B has an up-front cost of $59,000(CF0 = -59,000) and produces after-tax cash inflows of $20,000 a year at the end of the next four years. Assuming the cost of capital is 10.5%, 1. Compute the equivalent annual annuity of...
Fairland Enterprises, Inc. is considering two mutually exclusive projects, A and B. This project is mandated...
Fairland Enterprises, Inc. is considering two mutually exclusive projects, A and B. This project is mandated by state regulatory law to ensure employee safety in the firm’s production facility. Each of these projects generates no cash inflows. Instead, annual operating costs will be incurred to operate each project as per the information provided in the following table: Project A Project B Initial Investment at t = 0 ($20,000) ($30,000) Project Life 3 years 4 years Annual Operating Cost ($7,000) ($10,000)...
Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project Kelvin...
Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing​ system; it will cost ​$20,000 and generate cash inflows of ​$15,000 per year for the next 3 years. Project Thompson involves replacement of the existing​ system; it will cost ​$265,000 and generate cash inflows of ​$61,000 per year for 6 years. Using​ a(n) 9.28​% cost of​ capital, calculate each​ project's NPV, and make a recommendation based on your...
 Shell Camping​ Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment of...
 Shell Camping​ Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment of ​$140,000. John​ Shell, president of the​ company, has set a maximum payback period of 4 years. The​ after-tax cash inflows associated with each project are shown in the following​ table: 1 20,000 50,000 2 30,000 40,000 3 40,000 30,000 4 50,000 20,000 5 30,000 30,000 a.  Determine the payback period of each project. b.  Because they are mutually​ exclusive, Shell must choose one. Which...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT