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Use the data below for problems 6 to 10. SHOW ALL WORK IN EXCEL Year Proj Y Proj Z 0 ($210,000) ($210,000) 1 200,000 95,000

Use the data below for problems 6 to 10. SHOW ALL WORK IN EXCEL

Year

Proj Y

Proj Z

0

($210,000)

($210,000)

1

200,000

95,000

2

95,000

78,000

3

73,000

4

87,50

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have an 12% cost of capital.

6. What is each projects initial NPV without replication? Which project will you choose?

7. What is each projects equivalent annual annuity? Which project will you choose?

8. Now apply the replacement chain approach to determine the shorter projects extended NPV. Which project should be chosen?

9. Now assume that the cost to replicate Project Y in 2 years will increase to $2,500,000 because of inflationary pressures. How should the analysis be handled now, and which project should be chosen?

10. You are also considering another project which has a physical life of 3 years; that is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value. Here are the projects estimated cash flows:

Yr

CF

Salvage

0

($185,000)

$185,000

1

76,275

110,000

2

95,800

65,000

3

102,000

0

Using the 11% cost of capital, what is the projects NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the projects optimal (economic) life?

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