The Smith Pie Company is considering two mutually exclusive investments that would increase its capacity to make

Question:

The Smith Pie Company is considering two mutually exclusive investments that would increase its capacity to make strawberry tarts. The firm uses a 12 percent cost of capital to evaluate potential investments. The two projects have the following costs and expected cash flow streams:

a. Using these data, calculate the net present value for Projects A and B.
b. Create a replacement chain for Alternative A. Assume that the cost of replacing A will be $30,000 and that the replacement project will generate cash flows of $10,500 for years 5 through 8. Using these figures, recompute the net present value for Alternative A.
c. Which of the two alternatives should be chosen, A or B? Why?
d. Use the equivalent annual annuity method to solve this problem. How does your answer compare with the one obtained in partb?

Net Present Value
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