Expected Net Cash Flows

Year Project A Project B

0 ($100,000) ($100,000)

1 75,000 40,000

2 65,000 42,000

3 44,000

4 46,000

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 14% cost of capital.

a. What is each projects initial NPV without replication?

b. What is each projects equivalent annual annuity?

c. Suppose you replicate Project A so that it has the same life as Project B. Which project would you choose?