Wisconsin Dairy Inc. is deciding on its capital budget for the upcoming year. Among the projects being considered are two machines, W and WW. W costs $500,000 and will produce expected after-tax cash flows of $300,000 during the next 2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 during the next 4 years. Both projects have a 10% WACC.If the projects are independent and not repeatable, which project(s) should the company accept?If the projects are mutually exclusive but are not repeatable, which project should the company accept?Assume that the projects are mutually exclusive and can be repeated indefinitely.Use the replacement chain method to determine the NPV of the project selected.Use the equivalent annual annuity method to determine the annuity of the project selected.

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Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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Wisconsin Dairy Inc. is deciding on its capital budget for the upcoming year. Among the projects being considered are two machines, W and WW. W costs $500,000 and will produce expected after-tax cash flows of $300,000 during the next 2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 during the next 4 years. Both projects have a 10% WACC.
If the projects are independent and not repeatable, which project(s) should the company accept?
If the projects are mutually exclusive but are not repeatable, which project should the company accept?
Assume that the projects are mutually exclusive and can be repeated indefinitely.
1. Use the replacement chain method to determine the NPV of the project selected.
2. Use the equivalent annual annuity method to determine the annuity of the project selected.

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