Haleys Graphic Designs Question 2 [15 Marks] Haley\'s Graphic Designs Inc is con
ID: 2808273 • Letter: H
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Haleys Graphic Designs
Question 2 [15 Marks] Haley's Graphic Designs Inc is considering two mutually exclusive projects Both projects require an nitial investment of A10,000 and are typical average-nsk projects for the company Project A has an expected lte of 2 years with after-tax cash mflows of R6,000 and R8,000 at the end of Yoars 1 and 2 respectively Project B has an expected lfe of 4 years with atter-tax cash inflows of R4,000 al the end of each of the next 4 years The company's WACC is 10% Required: 21 If the projects cannot be repeated, which project should be selected it Haley uses NPV as its cnterion for project selection? flows Use the replacement chain analyss to determine the NPV of the project selected (5) what is the EAA of the project selected? 22 Assume that the projects can be repeated and that there are no anticipated changes in the cash 23 Make the same assumptions as in part 22 Using the equivalent annual annurty (EAA) methodExplanation / Answer
2.1) NPV of Project A = 6000/1.1+8000/1.1^2-10000 = $ 2,066 NPV of Project B = 4000*(1.1^4-1)/(0.1*1.1^4)-10000 = $ 2,679 Project B should be selected as it has higher NPV. 2.2) NPV of Project A = 6000/1.1+8000/1.1^2-10000-10000/1.1^2+6000/1.1^3+8000/1.1^4 = $ 3,774 NPV of Project B = 4000*(1.1^4-1)/(0.1*1.1^4)-10000 = $ 2,679 Project A should be selected as it has higher NPV, under replacement chain analysis. Under, replacement chain analysis, Project A would be repeated once so that its life becomes equal to the life of Project B. 2.3) Equivalent annual worth of Project A = 2066*(0.1*1.1^2)/(1.1^2-1) = $ 1,190 Equivalent annual worth of Project B = 2679*(0.1*1.1^4)/(1.1^4-1) = $ 845 Project A should be selected as it has higher Equivalent Annual Worth.
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