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Capital Budgeting-unequal lives

E10-4
Outcast, Inc., has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, M and N. The cash flows for each project are presented in the table at the top of the facing page. Calculate the NPV and the annualized net present value (ANPV) for each project using the firm's cost of capital of 8%. Which project would you recommend?
Project M Project N
Initial investment
$35,000
$55,000
Year Cash inflows
1
$12,000
$18,000
2
25,000
15,000
3
30,000
25,000
4
?
10,000
5
?
8,000
6
?
5,000
7
?
5,000

Solution Preview

Outcast, Inc., has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, M and N. The cash flows for each project are presented in the table at the top of the facing page. Calculate the NPV and the annualized net present value (ANPV) for each project using the firm's cost of capital of 8%. Which project would you recommend?
   Project M Project N
Initial investment $35,000 $55,000
Year Cash inflows

1 $12,000 $18,000
2 25,000 15,000
3 30,000 25,000
4 ? 10,000
5 ? 8,000
6 ? 5,000
7 ? 5,000

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Solution Summary

The solution evaluates 2 mutually exclusive projects with unequal lives.

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