Question

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%. | ||||||||||

Project 1 | Year | 0 | 1 | 2 | 3 | 4 | 5 | ||||

Cash Flow | -19,500 | 3,000 | $4,000 | $7,000 | $7,500 | $8,000 | |||||

Project 2 | Year | 0 | 1 | 2 | 3 | ||||||

Cash Flow | -18,000 | 8,500 | $10,000 | $4,500 | |||||||

Answer #1

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;...

QUESTION 20
For this and the next 3 questions. Consider the following
MUTUALLY EXCLUSIVE projects. Cost of capital is 10%. Calculate
IRR.
Year
Project A
Project B
0
-40,000
-20,000
1
8,000
7,000
2
14,000
13,000
3
13,000
12,000
4
12,000
5
11,000
6
10,000
IRR (A) = 17.47%. IRR(B) = 25.20%
IRR (A) = 17.77%. IRR(B) = 25.20%
IRR (A) = 17.47%. IRR(B) = 20%
None of the above is completely correct
1 points
QUESTION 21
Calculate NPV...

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...

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...

Your
firm is considering two projects with the following cash
flows.
WACC
6%
6%
year
Project A
Project B
0
-55,000
-70,000
1
10,000
10,000
2
9,000
10,000
3
8,000
10,000
4
7,500
10,000
5
7,500
10,000
6
7,500
10,000
7
7,500
10,000
8
7,500
12,000
a. Calculate NPV and IRR for
both projects
NPV
IRR
b. Do the
following 2...

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...

Suppose your firm is considering two mutually exclusive,
required projects with the cash flows shown below. The required
rate of return on projects of both of their risk class is 12
percent, and that the maximum allowable payback and discounted
payback statistic for the projects are 2 and 3 years,
respectively.
Time:
0
1
2
3
Project A Cash Flow
-29,000
19,000
39,000
10,000
Project B Cash Flow
-39,000
19,000
29,000
59,000
Use the PI decision rule to evaluate these...

19. Suppose your firm is considering two mutually exclusive,
required projects with the cash flows shown below. The required
rate of return on projects of both of their risk class is 10
percent, and that the maximum allowable payback and discounted
payback statistic for the projects are 2 and 3 years,
respectively.
Time:
0
1
2
3
Project A Cash Flow
-32,000
22,000
42,000
13,000
Project B Cash Flow
-42,000
22,000
8,000
62,000
Use the payback decision rule to evaluate...

Your company is considering two projects and has estimated the
following cash flows:
Year
Project A
Project B
0
-15,000
-20,000
1
10,000
10,000
2
10,000
18,000
1. If project B expands your manufacturing capacity by building
a separate factory, what is the relevant cash flow for evaluating
project B in year 2?
2. If project B replaces an existing factory (project A), what
is the relevant cash flow for evaluating project B in year 2?
3. If project B...

1. Suppose
your firm is considering two independent projects with the cash
flows shown as follows. The required rate of return on projects of
both of their risk class is 12 percent, and the maximum allowable
payback and discounted payback statistic for the projects are two
and a half and three years, respectively.
Time
0
1
2
3
Project A Cash Flow
?5,000
1,000
3,000
5,000
Project B Cash Flow
?10,000
5,000
5,000
5,000
Use the payback decision rule to...

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