Question

You are the finance manager for your company. You and your team have been analysing two mutually exclusive projects. The first project initially costs $1,000 and will return cash flows of $200 per year for the next six years. The second project initially costs $1,500 and will return $600 per year for the next three years.

The method that would not be correct when comparing these two projects is:

A. Calculate the net present value of each project over a six year period (by running the second project twice) and select the project with the highest net present value.

B. Calculate the net present value of each project for their lifetimes and select the project with the highest net present value.

C. Calculate the net present value of each project if each project was repeated an infinite number of times and select the project with the highest net present value.

D.Calculate the Equivalent Annual Annuity (EAA) of each project to find the annual annuity payment that has the same net present value as each project and select the project with the highest annuity payment.

Answer #1

B) Calculate the net present value of each project for their lifetimes and select the project with the highest net present value

When projects have different life , than decision shall be made by following method

1) Replacement chain method

here NPV is calculated by running shorter period project multiple times till it reaches life of larger period project

i.e if one project has life of 3 years and one project has life of 6 years , then project with 3 years life will be run 2 times

2) Equivalent Annuity method

In this method , projects are compared by calculating Equivalent annual NPV and decision is made

Thus option B is wrong

You are the finance manager for Monkey Manufacturing Company.
You have identified 5 new projects that you are considering for the
next financial year. The results of your analysis are presented in
the table below:
Project
Initial
Payback
Net
Internal
Profitability
Investment
Period
Present Value
Rate of Return
Index
($million)
(years)
($million)
(%)
A
20.00
2.5
13.8
12.2
B
10.00
3.1
7.1
12.5
C
5.00
4.2
3.4
12.3
D
5.00
2.9
3.0
11.9
E
5.00
3.4
3.7
12.8
a) Calculate the...

a. What is the amount of the annuity purchase
required if you wish to receive a fixed payment of $240,000 for 20
years? Assume that the annuity will earn 10 percent per year.
b. Calculate the annual cash flows (annuity
payments) from a fixed-payment annuity if the present value of the
20-year annuity is $1.4 million and the annuity earns a guaranteed
annual return of 10 percent. The payments are to begin at the end
of the current year.
c....

How much money would you have in a year if you put $1,000 in the
bank at an annual interest rate of 3 percent? How much would you
have if you left all of that money in the bank for another year and
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year?
How much would you loan your brother-in-law if he said he could
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Question 11
Your firm is considering the adoption of two new projects. However,
due to rationing requirements, only one can be chosen. Your boss
informs you that the decision will be made based on which project
provides the best Equivalent Annual Annuity, as it is assumed that
each project can be rolled over upon completion. Given the
information provided below, calculate the EAA for both projects and
identify which should be chosen. Both projects have a required
return of 13%....

The management team at Stanton Corporation is evaluating
two alternative capital investment opportunities. The first
alternative, modernizing the company’s current machinery, costs
$45,000. Management estimates the modernization project will reduce
annual net cash outflows by $12,500 per year for the next five
years. The second alternative, purchasing a new machine, costs
$56,500. The new machine is expected to have a five-year useful
life and a $4,000 salvage value. Management estimates the new
machine will generate cash inflows of $15,000 per...

a.
What is the amount of the annuity purchase required if you wish
to receive a fixed payment of $230,000 for 20 years? Assume that
the annuity will earn 13 percent per year. (Do not round
intermediate calculations. Round your answer to 2 decimal places.
(e.g., 32.16))
Present value
$
b.
Calculate the annual cash flows (annuity payments) from a
fixed-payment annuity if the present value of the 20-year annuity
is $1.4 million and the annuity earns a guaranteed annual...

Your firm is considering two projects. Your boss asked you to
use the Equivalent Annual Annuity method. Project A has an expected
life of seven years, will cost $50,000,000, and will produce net
cash flows of $12,000,000 each year. Project B has a life of
fourteen years, will cost $60,000,000, and will produce net cash
flows of $10,000,000 each year. The firm’s cost of capital is 12%.
What is the equivalent annual annuity for each project? Which
project should the...

Globex Corp. has to choose between two mutually exclusive
projects. If it chooses project A, Globex Corp. 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. If the firm uses the replacement chain (common
life) approach, what will be the difference between the net present
value (NPV) of project A...

. The following is a list of four projects that Capital
Corporation must choose from for the coming year: Project Project
Price Annual Net Inflows A 700,000 118,861 B 670,000 109,039 C
184,000 32,549 D 273,000 48,305
(a) Given a uniform rate of interest of 9% and a uniform life of
the projects of 10 years each, calculate the NPVs of each Project
(To calculate NPV, calculate the Present Value of a 10 year
annuity, and subtract the project price....

Note: Please answer the second question
(b) Should we choose Projects
A, C, D or Projects A, B, D. Explain
The following is a list of four projects that Capital
Corporation must choose from for the coming year: Project Project
Price Annual Net Inflows
A
700,000
118,861
B
670,000
109,039
C
184,000
32,549
D
273,000
48,305
Given a uniform rate of interest of 9% and a uniform
life of the projects of 10 years each, calculate the NPVs of each...

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