Asked by jesus salazar on Apr 24, 2024
Use the following information for the next three questions: Nelson, Inc. is considering two mutually exclusive projects. Project A is three years long with an initial cash outflow of $10,000 and expected annual inflows of $4,500. Project B is six years long with an initial cash outflow of $18,000 and annual cash inflows of $5,000. The cost of capital is 8%.
A. What is the NPV of the replacement chain for Project A (extending it to six years)?
a. $ 619
b. $1,106
c. $1,597
d. $2,865
e. $5,114
B. What is the equivalent annual annuity (EAA)for the preferred project (A or B)?
a. $ 619
b. $1,106
c. $1,597
d. $2,865
e. $5,114
C. Which of the projects should be selected and why?
a. Project B because its NPV is higher than project A's replacement chain NPV
b. Project A because it has a higher replacement chain NPV
c. Project B because it has a higher IRR
d. Project A because it has a higher EAA
e. Project B because it has a higher replacement chain NPV
Replacement Chain
A method for analyzing and comparing the economic life of alternative investment projects by equalizing their life spans through repeated investments.
NPV
Net Present Value, a method used in capital budgeting to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows.
Equivalent Annual Annuity
A financial concept used to evaluate the annual return of an investment over its lifetime, making it easier to compare the effectiveness of different investment opportunities.
- Acquire knowledge on the basics and practical implications of the Net Present Value (NPV) and Equivalent Annual Annuity (EAA) method for project assessment.
- Investigate cash flow predictions to determine project sustainability with multiple capital budgeting approaches.
- Apply different capital budgeting techniques to evaluate and compare mutually exclusive projects.
Learning Objectives
- Acquire knowledge on the basics and practical implications of the Net Present Value (NPV) and Equivalent Annual Annuity (EAA) method for project assessment.
- Investigate cash flow predictions to determine project sustainability with multiple capital budgeting approaches.
- Apply different capital budgeting techniques to evaluate and compare mutually exclusive projects.
Related questions
The Projected Cash Flows for Two Mutually Exclusive Projects Are ...
Scanlon Inc A)$14659 B)$154 ...
The Management of Opray Corporation Is Considering the Purchase of ...
Jojola Corporation Is Investigating Buying a Small Used Aircraft for ...
Niro Company Has Money Available for Investment and Is Considering ...