Question

In: Finance

What is the EAC of two projects: project A, which costs $150 and is expected to...

What is the EAC of two projects: project A, which costs $150 and is expected to last two years, and project B, which costs $190 and is expected to last three years? The cost of capital is 12%.

Solutions

Expert Solution

EAC = Asset price x Discount rate/ [1-(1+Discount rate)-number of periods]

EAC for Project A = $ 150 x 0.12/ [1-(1+0.12)-2]

                                = $ 18/ [1-(1.12)-2]

                                = $ 18/ (1-0.79719387755102)

                                = $ 18/ 0.20280612244898

                                = $ 88.754716981132 or $ 88.75

EAC for Project B = $ 190 x 0.12/ [1-(1+0.12)-3]

                                = $ 22.8/ [1-(1.12)-3]

                                = $ 22.8/ (1- 0.71178024781341)

                                = $ 22.8/ 0.28821975218659

                                = $ 79.1063063063063 or $ 79.11

Project B is preferable as EAC for Project B is less than Project A.


Related Solutions

What is the EAC of two projects: project A, which costs $150 and is expected to last two years, and project B, which costs $190 and is expected to last three years?
  Q2. What is the EAC of two projects: project A, which costs $150 and is expected to last two years, and project B, which costs $190 and is expected to last three years? The cost of capital is 12%. (1 mark) Answer: Q3. A company pays annual dividends of $10.40 with no possibility of it changing in the next several years. If the firm’s stock is currently selling at $80, what is the required rate of return? (1 mark)...
There are two projects that the company is considering: Project A costs 10,000 to implement today,...
There are two projects that the company is considering: Project A costs 10,000 to implement today, and it brings subsequent cash flows of 5,900 at the end of year 1; 2,000 at the end of year 2; 5,000 at the end of year 3. Project B's initial cost is 7,500, and subsequent cash flows are 5,000 per year for 3 years. WACC is 8% for both projects. Calculate NPV and IRR for each project, and decide which to recommend.
There are two projects that the company is considering: Project A costs 10,000 to implement today,...
There are two projects that the company is considering: Project A costs 10,000 to implement today, and it brings subsequent cash flows of 5,000 at the end of year 1; 4,000 at the end of year 2; 6,000 at the end of year 3. Project B's initial cost is 12,000, and subsequent cash flows are 6,000 per year for 3 years. WACC is 8% for both projects. a. Calculate NPV and IRR for each project, and decide which one to...
Suppose policymakers are presented with two projects to lower the level of pollution. Project A costs...
Suppose policymakers are presented with two projects to lower the level of pollution. Project A costs $2 million and it reduces the pollution by 4 percent and Project B costs $3 million and it lowers the level of pollution by 5 percent. Which project will be approved by Cost-Effective analysis? Why we used Cost-Effective analysis instead of Cost-Benefit analysis in this case?
The manager of FIRN is evaluating two mutually exclusive projects. The costs and expected cash flows...
The manager of FIRN is evaluating two mutually exclusive projects. The costs and expected cash flows are given in the following table. The appropriate discount rate is 11.5% per annum. Years Project X Project Y 0 -$300,000 -$350,000 1 $150,000 $150,000 2 $150,000 $150,000 3 $250,000 $200,000 4 $80,000 $200,000 5 $80,000 $200,000 IRR 42.2% 39.3% Calculate the crossover rate/incremental IRR, at which the NPV profiles for Projects A and B intersect. 2.Which project should be accepted based on your...
The manager of FIRN is evaluating two mutually exclusive projects. The costs and expected cash flows...
The manager of FIRN is evaluating two mutually exclusive projects. The costs and expected cash flows are given in the following table. The appropriate discount rate is 11.5% per annum. Years Project X Project Y 0 -$300,000 -$350,000 1 $150,000 $150,000 2 $150,000 $150,000 3 $250,000 $200,000 4 $80,000 $200,000 5 $80,000 $200,000 IRR 42.2% 39.3% 1. Calculate the projects’ net present value (NPV). Identify which project should be accepted under the rule of NPV. Explain your answer.       2. What...
What is the NPV of a project that costs $120,000 today and is expected to generate...
What is the NPV of a project that costs $120,000 today and is expected to generate annual cash inflows of $10,000 for the next 12 years, followed by a final inflow of $21,000 in the year after. Use discount rate of 14%. Round to the nearest cent.  
What is the NPV of a project that costs $31,000 today and is expected to generate...
What is the NPV of a project that costs $31,000 today and is expected to generate annual cash inflows of $11,000 for the next 7 years, followed by a final inflow of $13,000 in year 8. Cost of capital is 8.7%. Round to the nearest cent.
What is the NPV of a project that costs $111,000 today and is expected to generate...
What is the NPV of a project that costs $111,000 today and is expected to generate annual cash inflows of $12,000 for the next 11 years. Cost of capital (discount rate) is 11%. Round to the nearest cent.
What is the NPV of a project that costs $38,000 today and is expected to generate...
What is the NPV of a project that costs $38,000 today and is expected to generate annual cash inflows of $9,000 for the next 7 years, followed by a final inflow of $15,000 in year 8. Cost of capital is 7.4%. Round to the nearest cent.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT