QUESTION 31

On occasion, a company will be in the position of ranking mutually exclusive assets with different investment horizons, that is, unequal lives. For example:

Asset A

0 1 2 3 years

|---------------- |--------------- |--------------- |

-2000 1200 850 600

Asset B

0 1 2 3 4 5 6 years

|---------------- |--------------- |--------------- |---------------- |---------------- |---------------- |

-2000 200 450 200 525 450 1500

Based on the information above, answer the following.

A. What is the net present value (NPV) of Asset A? Use WACC = 10%.

B. What is the net present value (NPV) of Asset B? Use WACC = 10%.

C. Since Asset A and Asset B are mutually exclusive, only one can be chosen. Which one should be chosen? Use EITHER the Replacement Chain Method OR the Equivalent Annual Annuity Method (but NOT both) to make your decision.

D. If Assets A and B were independent, which would you choose? Why?