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

Question

30. Consider 2 mutually exclusive projects of different life spans with the following information: Project A: Amount of Cash flows $150 5300 $400 Year 2 3 Initial cash outlay = 500 Required rate of return-10% Project B: Year Amount of cash flows $200 $600 2 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 $1200.63; choose B D) NPVexpanded A = $298.34, NPVexpanded B-$445.90; choose A

Explanation / Answer

Calculation of NPV of the projects using replacement chain method In replacement chain method, the cash flows projections for the projects under consideration are repeated up to the least common useful life. In this example Project A has a life of 3 years and Project B has a life of 2 years , 6 years is the least common useful life i.e. project A is repeated 2 times and Project B is repeated 3 times. Year Project A Project B Cash Flow Discount factor @ 10% Present values Cash Flow Discount factor @ 10% Present values 0 -$500.00 1 -$500.00 -$500.00 1 -$500.00 1 $150.00           0.91 $136.36 $200.00           0.91 $181.82 2 $300.00           0.83 $247.93 $100.00           0.83 $82.64 3 -$100.00           0.75 -$75.13 $200.00           0.75 $150.26 4 $150.00           0.68 $102.45 $100.00           0.68 $68.30 5 $300.00           0.62 $186.28 $200.00           0.62 $124.18 6 $400.00           0.56 $225.79 $600.00           0.56 $338.68 NPV $323.68 $445.90 The answer is Option B.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

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