Question

# 18) a firm needs to decide between two mutually exclusive projects. Porject Alpha requires an initial...

18) a firm needs to decide between two mutually exclusive projects. Porject Alpha requires an initial investment of \$29,000 today and is expected to generate cash flow of \$43,000 for the next 3 years. Project Beta requires an initial investment of \$60,000 and is expected to generate cash flows of \$45,000 for the next 6 years. The cost of capital is 11%. The projects can be repeated with no change in cash flows. What is the NPV of the project that would be selected based on the replacement chain analysis?

A) project beta; \$140,439

B) Project alpha; \$132,489

C) project beta; \$132,489

D) project beta; \$140,928

E) project alpha; \$131,709

 Year Alpha Beta 0 -29,000 -60,000 1 43,000 45,000 2 43,000 45,000 3 14,000 45,000 4 43,000 45,000 5 43,000 45,000 6 43,000 45,000 NPV \$131,709 \$130,374

Forecast the cash flows for both projects as shown above. For Project Alpha in year 3, you need to start the chain again by investing 29,000.

NPV can be calculated using NPV function on a calculator or excel with 11% discount rate given the above cash flows.

We get NPV of Project Alpha is higher and is equal to \$131,709. Hence, E is correct.

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