19. Consider 2 mutually exclusive projects of different life spans with the foll

Question

19. Consider 2 mutually exclusive projects of different life spans with the following information:
Project A:
Year
Amount of Cash flows
1
$150
2
$300
3
$400
Initial cash outlay = 500
Required rate of return = 10%
Project B:
Year
Amount of cash flows
1
$200
2
$600
Initial cash outlay = 500
Required rate of return = 10%
What are the NPVs of these two expanded projects by using replacement chain method respectively, and which project should we choose?
A) NPVexpanded A = $184.82, NPVexpanded B = $177.69; choose A
B) NPVexpanded A = $323.68, NPVexpanded B = $445.90; choose B
C) NPVexpanded A = $699.34, NPVexpanded B = $1200.63; choose B
D) NPVexpanded A = $699.34, NPVexpanded B = $445.90; choose A

Explanation / Answer

1) Answer (A) NPVexpanded A = $184.82, NPVexpanded B = $177.69; choose A

Calculation :

NPV A = - $500 + $150*0.909 + $300*0.8264 + $400*0.7513

= - $500 + $684.82

= $184.82

NPV B = -$500 + $200*0.909 + $600*0.8264

= -$500 + $677.69

= $177.69

Since NPV of A is higher than the B choose A.

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