The Debonairness Company is considering two mutually exclusive investments that would

increase its capacity to make strawberry tarts. The company uses a $9$ percent cost of capital to

evaluate potential investments. The two projects have the following costs and expected cash

flow streams:

Project Alternative A Alternative B

$0-$R$25000,00-$R$25000$

$1$ R$10500,00$ R$6500,00$

$2$ R$10500,00$ R$6500,00$

$3$ R$10500,00$ R$6500,00$

$4$ R$10500,00$ R$6500,00$

$5-$ R$6500,00$

$6-$ R$6500,00$

$7-$ R$6500,00$

$8-$ R$6500,00$

Required:

$1\mathrm{.}1.$ Using these data, calculate the net present value for Projects A and B$.(4)$

$1\mathrm{.}2.$ Create a replacement chain for Alternative A$.$ Assume that the cost of replacing A will be

R$25,000$ and that the replacement project will generate cash flows of R$10,500$ for years

$5$ through $8.$ Using these figures, recalculate the net present value for Alternative A$.$

$(4)$

$1\mathrm{.}3.$ Which of the two alternatives should be chosen, A or B$?$ Why? $(2)$

$1\mathrm{.}4.$ Use the equivalent annual annuity method to solve this problem. How does your answer

compare with the one obtained in in part $1\mathrm{.}2?(8)$

MBA$5903$

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