Question

# Project X and Project Y are two mutually exclusive projects. Project X requires an initial outlay...

Project X and Project Y are two mutually exclusive projects. Project X requires an initial outlay of \$38,000 and generates a net cash flow of \$14,000 per year for six years. Project Y requires an initial outlay of \$52,000, and will generate cash flows of \$15,300 per year for eight years. Which project should be chosen and why? (Assume that the discount rate for both projects is 10 percent).
 A.  Project X because Project X has a larger NPV than Project Y. B.  Project Y because Project Y has a larger NPV than Project X. C.  Project Y because Project Y has a larger Equivalent Annual Series than Project X. D.  Project X because Project X has a larger Equivalent Annual Series than Project Y. E.  Both projects X and Y because both projects have positive NPV.

 equivalent annual cash flow for X = (initial investment/PVAF )-annual cash inflow (-38000/4.3552)+14000 5274.79794 equivalent annual cash flow for Y = (initial investment/PVAF )-annual cash inflow (-52000/5.3349)+15300 5552.86322 NPV of Equivalent annual cash flow of X = equivalent annual cash flow*PVAF at 10% for 6 Years 5274.9195*4.3552 22973.3294 NPV of Equivalent annual cash flow of Y = equivalent annual cash flow*PVAF at 10% for 6 Years 5552.911*4.3552 24184.038 Answer is B Project Y as it NPV of equivalent cash flow is more than Project X PVAF at 10% for 6 Years 1-(1+r)^-n / r 1-(1.1)^-6 / .10 4.3552 PVAF at 10% for 8 Years 1-(1+r)^-n / r 1-(1.1)^-8 / .10 5.3349

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