Question

                                                                                 Expected Net Cash Flows

                                            Year                    Project T                               Project F

                                               0                      ($100,000)                            ($100,000)

                                               1                           75,000                                  40,000

                                               2                           65,000                                  42,000

                                               3                              —                                      44,000

                                               4                              —                                      46,000

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 12% cost of capital.

a.   What is each project’s initial NPV without replication?

b.   What is each project’s equivalent annual annuity?

c.   Suppose you replicate Project T so that it has the same life as Project F. Which project would you choose?

 

Answer 1

a&b  

Year	Project T	Project F
0	-100000	-100000
1	75000	40000
2	65000	42000
3		44000
4		46000
NPV	18781.88776	29748.59108
EAC	$11,113.21	$9,794.26

c)

Year	Project T	Project F
0	-100000	-100000
1	75000	40000
2	-35000	42000
3	75000	44000
4	65000	46000
NPV	33754.69368	29748.59108
EAC	$11,113.21	$9,794.26

Select Project T