Project X and Project Y are two mutually exclusive projects. Project X requires

Question

Project X and Project Y are two mutually exclusive projects. Project X requires an initial outlay of $38,000 and generates a net cash flow of $14,000 per year for six years. Project Y requires an initial outlay of $52,000, and will generate cash flows of $15,300 per year for eight years. Which project should be chosen and why? (Assume that the discount rate for both projects is 10 percent). A.  Project X because Project X has a larger NPV than Project Y. B.  Project Y because Project Y has a larger NPV than Project X. C.  Project Y because Project Y has a larger Equivalent Annual Series than Project X. D.  Project X because Project X has a larger Equivalent Annual Series than Project Y. E.  Both projects X and Y because both projects have positive NPV. Project X and Project Y are two mutually exclusive projects. Project X requires an initial outlay of $38,000 and generates a net cash flow of $14,000 per year for six years. Project Y requires an initial outlay of $52,000, and will generate cash flows of $15,300 per year for eight years. Which project should be chosen and why? (Assume that the discount rate for both projects is 10 percent). A.  Project X because Project X has a larger NPV than Project Y. B.  Project Y because Project Y has a larger NPV than Project X. C.  Project Y because Project Y has a larger Equivalent Annual Series than Project X. D.  Project X because Project X has a larger Equivalent Annual Series than Project Y. E.  Both projects X and Y because both projects have positive NPV.

Explanation / Answer

equivalent annual cash flow for X = (initial investment/PVAF )-annual cash inflow

(-38000/4.3552)+14000

5274.79794

equivalent annual cash flow for Y = (initial investment/PVAF )-annual cash inflow

(-52000/5.3349)+15300

5552.86322

NPV of Equivalent annual cash flow of X = equivalent annual cash flow*PVAF at 10% for 6 Years

5274.9195*4.3552

22973.3294

NPV of Equivalent annual cash flow of Y = equivalent annual cash flow*PVAF at 10% for 6 Years

5552.911*4.3552

24184.038

Answer is B

Project Y as it NPV of equivalent cash flow is more than Project X

PVAF at 10% for 6 Years

1-(1+r)^-n / r

1-(1.1)^-6 / .10

4.3552

PVAF at 10% for 8 Years

1-(1+r)^-n / r

1-(1.1)^-8 / .10

5.3349

equivalent annual cash flow for X = (initial investment/PVAF )-annual cash inflow

(-38000/4.3552)+14000

5274.79794

equivalent annual cash flow for Y = (initial investment/PVAF )-annual cash inflow

(-52000/5.3349)+15300

5552.86322

NPV of Equivalent annual cash flow of X = equivalent annual cash flow*PVAF at 10% for 6 Years

5274.9195*4.3552

22973.3294

NPV of Equivalent annual cash flow of Y = equivalent annual cash flow*PVAF at 10% for 6 Years

5552.911*4.3552

24184.038

Answer is B

Project Y as it NPV of equivalent cash flow is more than Project X

PVAF at 10% for 6 Years

1-(1+r)^-n / r

1-(1.1)^-6 / .10

4.3552

PVAF at 10% for 8 Years

1-(1+r)^-n / r

1-(1.1)^-8 / .10

5.3349

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