zelluse corp is considering two mutually exclusive projects, a and b. project a

Question

zelluse corp is considering two mutually exclusive projects, a

and b. project a cost $50,000 and is expected to generate $38,000

in year one and $30,000 in year two. Project b costs $70,000 and is

expected to generate $24,000 in year one $32,000 in year two,

$23,000 in year three and $29,000 in year four. Zelluose Corp has

required rate of return for these projects is 12%. whixh project would reccomend using the replacement chain method to evaluate the projects with different live?

A) Project B because the replacement chain NPV for project A is only $10,972

B) project A because its replacement chain NPV is $ 14,098, which exceeds the NPV for project B.

C) Project A because its replacment chain NPV is $15,689 which exceeds the NPV for projects B.

D)Project B because its NPV is higher than projects A's NPV.

Explanation / Answer

NPV for project a is -50000 + 38000/1.12 + 30000/1.12^2 = 7844.39

NPV for project b is -70000 + 24000/1.12 + 32000/1.12^2 + 23000/1.12^3 + 29000/1.12^4 = 11739.75

The using replacement chain NPV is 4 year NPV for project A is 7844.39 * 2 = 15,689

Hence

C) Project A because its replacment chain NPV is $15,689 which exceeds the NPV for projects B.

Related Questions

Navigate

• Browse (All)
• Browse Z
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.