Question
Mesa Steel is evaluating two mutually exclusive projects that will allow the firm to increase its production capacity by 25%. The first alternative requires an
Mesa Steel is evaluating two mutually exclusive projects that will allow the firm to increase its production capacity by 25%. The first alternative requires an investment of $2,000,000 and is expected to generate net annual cash flows of $750,000 in each of the next 5 years of its economic life. The required rate of return on this project is 15%. The second alternative requires an investment of $3,000,000 and is expected to generate net annual cash flows of $700,000 in each of the next 10 years of its economic life. The second alternative is less risky than the first alternative, therefore, Mesa requires a 12% rate of return on the project. Use the equivalent annual annuity approach to determine which project should be adopted?
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