Mulroney Corp. is considering two mutually exclusive projects. Both require an i
ID: 2804461 • Letter: M
Question
Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,000 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $4,000 at the end of each of the next 4 years. Each project has a WACC of 8%.
18. Use the replacement chain approach to determine the common life NPV of the most profitable project.
a. $4,484
b. $4,734
c. $5,120
d. $5,897
e. $5,456
19. Use the EAA approach to determine the Equivelent annual annuity of the most profitable project.
a. $912.32
b. $980.79
c. $1,156.34
d. $1,353.85
e. $1,698.47
Explanation / Answer
(i) NPV Machine A - year Cash flow(1st machine) Cash flow(2nd machine) PV factor @ 8% PV 0 -10000 1 -10000 1 6000 0.925926 5555.556 2 8000 -10000 0.857339 -1714.68 3 6000 0.793832 4762.993 4 8000 0.73503 5880.239 4484.11 Machine A - year Cash flow PV factor @ 8% PV 0 -10000 1 -10000 1 4000 0.925926 3703.704 2 4000 0.857339 3429.355 3 4000 0.793832 3175.329 4 4000 0.73503 2940.119 3248.507 Answer is A (4484) Machine A (ii) NPV of machines = Machine B = 3248.507 Machine A = year Cash flow PV factor @ 8% PV 0 -10000 1 -10000 1 6000 0.925926 5555.556 2 8000 0.857339 6858.711 2414.266 Machine A B NPV 2414.266 3248.507 Annuity factor(8%,Life) 1.7833 3.3121 EAA NPV/Annuity 1353.846 980.792 Answer D Please provide feedback…. Thanks in advance…. :-)
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