Project Selection Via NPV
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Projects with unequal lives Haley's Graphic Designs Inc, is considering two mutually exclusive projects. Both require an initial investment of $10,000, and their risks are average for the firm. Project A has an expected life of 2 years with after -tax cash inflows of $6,000 and $8,000 at the end of Year 1 and 2, respectively. Project B has an expected life of 4 years with after tax cash inflows of $4,000 at the end of each of the next 4 years. The firm's EACC is 10%.
a) If the projects cannot be repeated, which project should be selected if Haley uses NPV as its criterion for project selection?
b) Assume 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
c) Make the same assumptions in part b. Use the equivalent annual method to determine the annuity of the project selected.
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Solution Summary
Almost 250 words of explained calculations show how to select from two projects using NPV and the equivalent annual method.
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a) If the projects cannot be repeated, which project should be selected if Haley uses NPV as its criterion for project selection?
Project A NPV = -10000 + 6000/(1+10%)+8000/(1+10%)^2 = 2066.12
Project B NPV = -10000 + 4000/(1+10%)+4000/(1+10%)^2 + 4000/(1+10%)^3 + 4000/(1+10%)^4 = 2679.46
If the project cannot be repeated The project B has a higher NPV and should be selected.
b) Assume ...
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