Question

Haley’s Crockett Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $11,000 and are typical average-risk projects for the firm. Project A has an expected life of 2 years with after-tax cash inflows of $8,000 and $10,000 at the end of Years 1 and 2, respectively. Project B has an expected life of 4 years with after-tax cash inflows of $8,000 at the end of each of the next 4 years. The firm’s WACC is 12%.

Assume that the projects can be repeated and that there are no anticipated changes in the cash flows. Use the replacement chain analysis to determine the NPV of the project selected. Do not round intermediate calculations. Round your answer to the nearest cent.

Since Project B 's extended NPV = $ , it should be selected over Project A with an NPV = $ .

Answer #1

Application of the replacement chain (lowest common life) approach involves replacing Project A at the end of it 2-year life with an identical project over years 3-4.This allows a direct comparison of both projects over their lowest common 4-year life.

Project A

NPV = -$11,000 + [$8,000/1.12] + [($10,000 -
$11,000)/1.12^{2}] + [$8,000/1.12^{3}] +
[$10,000/1.12^{4}]

= -$11,000 + $7,142.86 - $797.19 + $5,694.24 + $6,355.18 = $7,395.09

Project B

NPV = -$11,000 + [$8,000{(1 - 1.12^{-4}) / 0.12}]

= -$11,000 + [$8,000 x 3.0373] = -$11,000 + $24,298.79 = $13,298.79

As such,based on the replacement chain analysis, Project B should be selected over Project A because it provides a higher NPV over the 4-year common-life period.

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...

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...

A firm needs to decide between two mutually exclusive projects.
Project Alpha requires an initial investment of $37,000 today and
is expected to generate cash flows of $31,000 for the next 4 years.
Project Beta requires an initial investment of $92,000 and is
expected to generate cash flows of $36,400 for the next 8 years.
The cost of capital is 10%. The projects can be repeated with no
change in cash flows. What is the NPV of the project that...

A firm needs to decide between two mutually exclusive projects.
Project Alpha requires an initial investment of 50,000 today and is
expected to generate cash flows of 51,000 for the next 3 years.
Project Beta requires an intial investment of 85,000 and is
expected to generate cash flows of 49,700 for the next 6 years. The
cost of capital is 6%. The projects can be repeated with no charge
in cash flows. What is the NPV of the project that...

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...

Axis Corp. is considering an investment in the best of two
mutually exclusive projects.
Project Kelvin involves an overhaul of the existing system; it
will cost $20,000 and generate cash inflows of $15,000 per year
for the next 3 years.
Project Thompson involves replacement of the existing system;
it will cost $265,000 and generate cash inflows of $61,000 per
year for 6 years.
Using a(n) 9.28% cost of capital, calculate each project's
NPV, and make a recommendation based on your...

Axis Corp. is considering an investment in the best of two
mutually exclusive projects. Project Kelvin involves an overhaul of
the existing system; it will cost $70,000 and generate cash
inflows of $30,000 per year for the next 3 years. Project Thompson
involves the replacement of the existing system; it will cost
$275, 000 and generate cash inflows of $61 comma 000 per year for
6 years. Using a(n) 11.14% cost of capital, calculate each
project's NPV, and make a...

Ace Inc. is evaluating two mutually exclusive projects—Project A
and Project B. The initial cash outflow is $50,000 for each
project. Project A results in cash inflows of $15,625 at the end of
each of the next five years. Project B results in one cash inflow
of $99,500 at the end of the fifth year. The required rate of
return of Ace Inc. is 10 percent. Ace Inc. should invest in:
a. Project B because it has no cash inflows...

Shell Camping Gear, Inc., is considering two mutually
exclusive projects. Each requires an initial investment of
$140,000. John Shell, president of the company, has set a
maximum payback period of 4 years. The after-tax cash inflows
associated with each project are shown in the following
table:
1 20,000 50,000
2 30,000 40,000
3 40,000 30,000
4 50,000 20,000
5 30,000 30,000
a. Determine the payback period of each project.
b. Because they are mutually exclusive, Shell must choose one.
Which...

Ace Inc. is evaluating two mutually exclusive projects—Project A
and Project B. The initial cash outflow is $50,000 for each
project. Project A results in cash inflows of $15,625 at the end of
each of the next five years. Project B results in one cash inflow
of $99,500 at the end of the fifth year. The required rate of
return of Ace Inc. is 10 percent. Ace Inc. should invest in:
a.Project B because it has no cash inflows in...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 40 minutes ago

asked 41 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago