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3. Dickson Company is now considering two mutually exclusive projects with useful lives of 3 years (Project S) and 6 years (Project L) respectively.
3. Dickson Company is now considering two mutually exclusive projects with useful lives of 3 years (Project S) and 6 years (Project L) respectively. The detailed after-tax cash flows for Project S & Project L are given as follows: Year Project L's cash flows -$51,500 $13,000 $19,000 $11,000 $20,000 $10,000 $8,000 The company's required rate of return is 15%. a. Which project decision criteria should be the most appropriate if the company is highly concerned with the time value of money? Calculate the Net Contribution to the company for Project S & Project L respectively based on your choice. Which project should be chosen ? 0 1 Project S's cash flows -$60,000 $40,000 $20,000 $17,000 2 3 4 5 6 b. To help the evaluate the projects in an alternative way, the Project Manager of Dickson Company wants to treat each of these two projects as an annuity which generate annual & equal, and end-of-period cash flows for the company (we may call this 'Equivalent Annual Annuity (EAA)'). Calculate the EAA for Project S & Project L respectively. Is the choice of project different from the one in part a ? Explain.
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