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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

UNEQUAL LIVES Haley’s Graphic Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $10,000 and are typical average-risk projects for the firm. Project A has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,000 at the end of Years 1 and 2, respectively. Project B has an expected life of 4 years with after-tax cash inflows of $4,000 at the end of each of the next 4 years. The firm’s WACC is 10%.

  1. a. If the projects cannot be repeated, which project should be selected if Haley uses NPV as its criterion for project selection?
  2. b. Assume that the projects can be repeated and that there are no anticipated changes in the cash flows. Use the replacement chain analysis to determine the NPV of the project selected.
  3. c. Make the same assumptions as in part b. Using the equivalent annual annuity (EAA) method, what is the EAA of the project selected?

a.

Summary Introduction

To Determine: The project that should be selected if Company H uses NPV as its selection criterion.

Introduction: The replacement chain is a technique of capital budgeting decision model that is utilized to look at least two mutually exclusive capital recommendations with uneven lives.

Explanation

Determine the net present value for Project A and Project B

Using a excel spreadsheet, the net present value for Project A is determined as $2,066.12 and for Project B is $2,679.46.

Excel Spreadsheet:

b.

Summary Introduction

To Determine: The net present value of project selected using replacement chain analysis.

c.

Summary Introduction

To Determine: The equivalent annual annuity for Project A and Project B.

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