Question
Wizard Inc. has to choose between two mutually exclusive projects. If it chooses project A, Wizard Inc. will have the opportunity to make a similar
Wizard Inc. has to choose between two mutually exclusive projects. If it chooses project A, Wizard Inc. 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 11%?
| Cash Flow | |||
|---|---|---|---|
| Project A | |||
| 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 |
A. $18,097
B. $14,807
C. $9,871
D.$16,452
E. $11,516
Wizard Inc. is considering a five-year project that has a weighted average cost of capital of 14% and a NPV of $80,720. Wizard Inc. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?
A. $22,336
B. $19,985
C. $29,390
D. $28,214
E. $23,512
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Financial Markets And Institutions A Modern Perspective
Authors: Anthony Saunders, Marcia Millon Cornett, Marcia Cornett
2nd Edition
007294109X, 978-0072941098
