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UNEQUAL LIVES Crockett Graphic Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $11,000 and are typical average-risk projects for the firm. Project A has an expected life of 2 years with after tax cash inflows of $8,000 and $10,000 at the end of Years 1 and 2, respectively. Project B has an expected life of 4 years with after-tax cash inflows of $5,500 at the end of each of the next 4 years. The firm's WACC is 12%. a. If the projects cannot be repeated, which project should be selected if Crockett uses NPV as its criterion for project selection? b. Assume that the projects can be appealed and that there are no anticipated changes in the cash flows. Use the replacement chain analysis to determine the NPV of the project selected. c. Make the same assumptions as in part b. Using the equivalent annual annuity (EAA) method, what is the EAA the project selected?

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter
Section
Chapter 12, Problem 13P
Textbook Problem

UNEQUAL LIVES Crockett Graphic Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $11,000 and are typical average-risk projects for the firm. Project A has an expected life of 2 years with after tax cash inflows of $8,000 and $10,000 at the end of Years 1 and 2, respectively. Project B has an expected life of 4 years with after-tax cash inflows of $5,500 at the end of each of the next 4 years. The firm's WACC is 12%.

  1. a. If the projects cannot be repeated, which project should be selected if Crockett uses NPV as its criterion for project selection?
  2. b. Assume that the projects can be appealed 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 the project selected?

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Chapter 12 Solutions

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