Suppose a firm is considering two mutually exclusive projects. One has alife of 6 years and the other a life of 10 years. Would the failure to employsome type of replacement chain analysis bias an NPV analysis against oneof the projects? Explain.

Suppose a firm is considering two mutually exclusive projects. One has alife of 6 years and the other a life of 10 years. Would the failure to employsome type of replacement chain analysis bias an NPV analysis against oneof the projects? Explain.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 7MC

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Suppose a firm is considering two mutually exclusive projects. One has a
life of 6 years and the other a life of 10 years. Would the failure to employ
some type of replacement chain analysis bias an NPV analysis against one
of the projects? Explain.

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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