7. Unequal project lives

ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 12%?

Cash Flow

Project A Project B

Year 0: $17,500 Year 0: $45,000

Year 1: 10,000 Year 1: 10,000

Year 2: 16,000 Year 2: 17,000

Year 3: 15,000 Year 3: 16,000

Year 4: 15,000

Year 5: 14,000

Year 6: 13,000

$12,506

$11,255

$8,754

$8,129

$10,630

ABC Telecom is considering a five-year project that has a weighted average cost of capital of 13% and a NPV of $30,450. ABC Telecom can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?

$8,657

$9,956

$7,791

$8,224

$10,388