Question

# 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 be repeated. The controller prefers Project S, but the CFO prefers Project L. How much value will the firm gain or lose if Project L is selected over Project S, i.e., what is the value of NPVL - NPVS?

 \$324.37 \$262.74 \$291.93 \$392.48 \$356.80

NPV = PV of Cash Inflows - PV of Cash Outflows

Project S:

 Year CF PVF @9% Disc CF 0 \$ -15,000.00 1.0000 \$ -15,000.00 1 \$    7,000.00 0.9174 \$      6,422.02 2 \$ 12,000.00 0.8417 \$    10,100.16 NPV \$      1,522.18

Project L:

 Year CF PVF @9% Disc CF 0 \$ -15,000.00 1.0000 \$ -15,000.00 1 \$    5,200.00 0.9174 \$      4,770.64 2 \$    5,200.00 0.8417 \$      4,376.74 3 \$    5,200.00 0.7722 \$      4,015.35 4 \$    5,200.00 0.7084 \$      3,683.81 NPV \$      1,846.55

NPVL - NPVS

= \$ 1846.55 - \$ 1522.18

= \$ 324.37

Option A is correct

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