Answer the following questions and put calculations: 10. Which of the following

Question

Answer the following questions and put calculations:

10. Which of the following best describes the appropriate way to evaluate mutually exclusive projects with unequal lives?

a)NPV is the appropriate method because NPV is always the method of choice

b)IRR is the appropriate method because IRR adjusts for the fact that the projects are not of the same length

c)Replacement chain is the appropriate method because it equalizes the length of the unequal projects

d)Equivalent annual annuity is the appropriate method because it adjusts for the fact that the projects are not of the same length

e)Both c. and d. are correct

12. Use the following information for the next four questions. Norlin Corporation is considering an expansion project that will begin next year (Time 0). Norlin's cost of capital is 12%. The initial cost of the project will be $250,000, and it is expected to generate the following cash flows over its five-year life:

Year

$

1

$40,000

2

$60,000

3

$90,000

4

$90,000

5

$90,000

a) What is the payback period for the expansion project?

i)3.67 years

ii)4.00 years

iii)4.25 years

iv)4.67 years

v)5.00 years

b) What is the net present value (NPV) of for the expansion project?

i)($45,197)

ii)$5,871

iii)$13,784

iv)$25,726

v)$120,000

c) What is the internal rate of return (IRR) for the expansion project?

i)4.13%

ii)6.50%

iii)10.36%

iv)12.83%

v)14.67%

d) What is the Profitability Index (PI) for the expansion project?

i)1.02

ii)1.05

iii)1.10

iv)1.48

v)Cannot be determined

Year

$

1

$40,000

2

$60,000

3

$90,000

4

$90,000

5

$90,000

Explanation / Answer

10)

Replacement chain and equivalent annual annuity are best methods available for comparing unequal live mutual projects. Project with highest EAA should be preferred.

Hence, correct option is e) Both c. and d. are correct.

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