Atlas Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,000 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years with after-tax cash inflows of $4,373 at the end of each of the next 4 years. Each project has a WACC of 10.75%, and Project S can be repeated with no changes in its cash flows. 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?
Please refer attached file for better clarity of tables and formulas.
Let us consider the cash flows associated with project S.
Initial investment=Co=($10,000) Negative sign indicates cash outflow
After Tax Cash flow in at the end of year 1= $6,000
After Tax Cash flow in at the end of year 2= $8,000
Project L has life of 4 years. So, Project S should be repeated at the end of 2nd ...
Solution calculates the value gained or lost by the company if Project L is selected over Project S.