Question
10. You are trying to determine which of two mutually exclusive projects to undertake. Both projects have the same initial outlay. Project Adam has an
10. You are trying to determine which of two mutually exclusive projects to undertake. Both projects have the same initial outlay. Project Adam has an NPV of $4,392.15, an IRR of 11.33%, and an EAA of $1,158.64. Project Eve has an NPV of $5,833.73, an IRR of 9.88%, and an EAA of $1,093.50. The cost of capital for both projects is 9%, the projects have different lives, and the projects are repeatable. What should you do?
a. You should do neither project because neither of them would add value to your company.
b. You should do Project Adam because it has a higher EAA.
c. You should do Project Adam because it has a higher IRR.
d. You should do both projects because both have positive NPVs.
e. You should do Project Eve because it has a higher NPV.
11. A company is planning to sell old equipment that was purchased 10 years ago for $1,500,000. The market value of the equipment is $500,000. The equipment has depreciated to a book value of 100,000. What is the tax implication of the sale of this equipment? The companys marginal tax rate is 34%.
a. tax liability of $136,000
b. tax savings of $136,000
c. tax savings of $34,000
d. tax liability of $34,000
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