Allied Biscuit Co. has to choose between two mutually exclusive projects. If it
ID: 2765538 • Letter: A
Question
Allied Biscuit Co. has to choose between two mutually exclusive projects. If it chooses project A, Allied Biscuit Co. 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 bothe projects have a weighted average cost of capital of 13%? $12,140 $17,343 $19,077 $10,406 $13,007 Allied Biscuit Co. is considefined theg a five-year project that has a weighted average cost of capital of 13% and a NPV of $30,450. Allied Biscuit Co. can replicate this project indefinitely. What is the equivalent annual annuity (Eas) for this project? $7,358 $9,956 $8,657 $10,821 $8,224Explanation / Answer
Eqivalent annual annuity EAA=NPV/Annuity factor for 5 years @13%=$30,450/3.5172=$8,657
Annuity factor for 5 years @13%=1/(1.13)+1/(1.13)2................+1/(1.13)5=3.5172
NPV-Project A Year Cash flow PV@13% PV 0 -12,500 1.0000 -12,500 1 8,000 0.8850 7,080 2 14,000 0.7831 10,964 3 13,000 0.6931 9,010 14,553 NPV-Projecte B Year Cash flow PV@13% PV 0 -45,000 1.0000 -45,000 1 9,000 0.8850 7,965 2 16,000 0.7831 12,530 3 15,000 0.6931 10,396 4 14,000 0.6133 8,586 5 13,000 0.5428 7,056 6 12,000 0.4803 5,764 7,297 Difference in NPA of Project A and Project B 7,256Related Questions
Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.