In: Finance
Expected Net Cash Flows
Year Project A Project B
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 14% 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 A so that it has the same life as Project B. Which project would you choose?