Year

Project S

Project L

0

($400,000)

($400,000)

1

240,000

134,000

2

240,000

134,000

3

134,000

4

134,000

Now assume that the cost to replicate Project S in 2 years is estimated to be $420,000 because of inflationary pressures. Similar investment cost increases will occur for both projects in Year 4 and beyond. How would this affect the analysis? Which project should be chosen under this assumption?

Project S NPV = $9,330Project L NPV = $28,014

Project S EAA = $1,749Project L EAA = $5,251

It is clear that when the investment cost is increased for replication of both projects, the cost incurred is too high for acceptance of Project S over Project L. Both the replacement chain and EAA approaches lead to an acceptance of Project L in this situation.

Can anyone show the calculations on how to get the NPV and EAA values mentioned above?