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2. (10 points) A firm is considering two mutually exclusive projects. Project A has an initial cost of $150,000 (CF0 = -150,000) and produces positive
2. (10 points) A firm is considering two mutually exclusive projects. Project A has an initial cost of $150,000 (CF0 = -150,000) and produces positive after-tax cash inflows of $50,000 a year at the end of each of the next 3 years. Project B has an initial cost of $80,000(CF0 = -80,000) and produces after-tax cash inflows of $40,000 a year at the end of the next 2 years. If we assume that both projects can be replaced to repeat. The companys cost of capital is 8%. What is the most profitable project? (1) Use the Replacement Chain Approach. Note: Repeat Project A for 2 times and repeat Project B for 3 times. (2) Use the Equivalent Annual Annuity (EAA) analysis
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