Question
Widget Corp. has to choose between two mutually exclusive projects. If it chooses project A, Widget Corp. will have the opportunity to make a similar
Widget Corp. has to choose between two mutually exclusive projects. If it chooses project A, Widget Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%?
| Cash Flow | |||
|---|---|---|---|
| Project A | Project B | ||
| Year 0: | $15,000 | Year 0: | $45,000 |
| Year 1: | 9,000 | Year 1: | 9,000 |
| Year 2: | 15,000 | Year 2: | 16,000 |
| Year 3: | 14,000 | Year 3: | 15,000 |
| Year 4: | 14,000 | ||
| Year 5: | 13,000 | ||
| Year 6: | 12,000 |
O $14,497
O $10,470
O $11,276
O $12,081
O $16,108
Widget Corp. is considering a five-year project that has a weighted average cost of capital of 12% and a NPV of $56,489. Widget Corp. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?
O $15,671
O $18,805
O $14,887
O $16,455
O $14,104
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