Question 2

Lion Rock Investment is a venture capital firm focused on forestry projects and the company uses a 10% discount rate to select investments. Lion Rock is now considering investing in one project between two candidates: code-named projects Cello and Violin. The following are the projected after-tax cash flows of the two projects: Answer the following questions:

a) Using the equivalent annual annuity (EAA) method, advise Lion Rock on which project the firm should choose.

b) Explain the time disparity problem and the unequal life span problem. What are the two problems implied in project selection? Explain which problem appears in this case.

After-tax cash flows (S) Project Cello -3,800,000.00 1,200,000.00 1,200,000.00 1,100,000.00 1,100,000.00 880,000.00 880,000.00 Project Violin -3,800,000.00 960,000.00 960,000.00 2,100,000.00 2,100,000.00 Year 4