Consider the following mutually exclusive projects.

Cash flows Cash flows

Year for Project REC for Project XYZ

0 -1000 -1000

1 500 100

2 1400 300

3 400

4 600

5 350

6 125

The appropriate WACC for both projects is 5% per year.

1. Using the cash flows as given above, what is the Net Present Value (NPV) of Project REC? What is its Internal Rate of Return (IRR)?

2. Using the cash flows as given above, what is the Net Present Value (NPV) of Project XYZ? What is its Internal Rate of Return (IRR)?

3. Using the Replacement Chain method, which of the two mutually exclusive projects should be chosen? Why? SHOW YOUR WORK.

4. Using the Equivalent Annual Annuity (EAA) method, which of the two mutually exclusive projects should be chosen? Why? SHOW YOUR WORK.