Both of these projects are in Robert Montoya's main line of business, table wine, and the investment which is chosen is expected to be repeated indefinitely into the future. Also, each project is of average risk, hence each is assigned the 10 percent corporate cost of capital. a. What is each project's single-cycle NPV? Now apply the replacement chain approach and then repeat the analysis using the equivalent annual annuity approach. Which project should be chosen, 5 or L? Why? Replacement Chain Approach: Project S single NPV = $16,529 Project L single NPV = $24,762 Project S is adjusted for the the common life of 4 years Project S replacement chain NPV = $30,189 Project S should be chosen because, as mentioned, whichever project is chosen would be repeated indefinitely, and this project, when repeated, has an NPV much larger than the NPV of Project L for the 4 year lifetime. When both are repeated to 8 years, Project S is still expected to have a higher NPV than Project L leading to the same acceptance decision. Equivalent Annual Annuity Approach: Project S EAA = $9,524 Project L EAA = $7,812 Project 5 EAA > Project L EAA so we would again choose project S. b. Now assume that the cost to replicate Project S in 2 years is estimated to be $420,000 because of inflationary pressures. Similar investment cost increases will occur for both projects in Year 4 and beyond. How would this affect the analysis? Which project should be chosen under this assumption? Project S NPV = $9,330 Project L NPV = $28,014 Project 5 EAA = $1,749 Project L EAA = $5,251 It is clear that when the investment cost is increased for replication of both projects, the cost incurred is too high for acceptance of Project 5 over Project L. Both the replacement chain and EAA approaches lead to an acceptance of Project L in this situation