Question
The managers of Wauconda Foods, Inc. want to create a new protein supplement. The firm anticipates strong demand over the next 8 years as U.S.
The managers of Wauconda Foods, Inc. want to create a new protein supplement. The firm anticipates strong demand over the next 8 years as U.S. consumers seek out healthier foods, and it can meet that demand with either of two methods (projects), supported by different types of equipment. The two projects would be equally risky, such that the annual weighted average cost of capital (WACC) for either project would be 8.4%. Project A has an 8-year expected life and Net Present Value of $15,000,000. Project B has a 4-year expected life and an NPV of $8,850,000. Because demand should contiunue throughout the next 8 years, Project B, if chosen, would be repeated once (over years 5 to 8). It is assumed that the NPV for a repetition of Project B would also be $8,850,000 at the future date when it is repeated (efficiency gains should offset any inflationary effects). Based on the replacement chain method of analysis, what are the two relevant total NPV figures to compare? Find project A and B
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