1. (20 points) You are evaluating two mutually exclusive projects. The cash flows for each are:

Project A Project B

Year 0 ($60,000) ($85,000)

Year 1 $20,000 $22,000

Year 2 $35,000 $25,000

Year 3 $20,000 $30,000

Year 4 $25,000 $25,000

Year 5 $15,000

Year 6 $10,000

Year 7 $10,000

Year 8 $10,000

Assume that, if needed, each project is repeatable with no change in cash flows. Your cost of capital is 13%.

1. Using the replacement chain approach, which project would you chose to invest in?

2. Using the equivalent annual annuity approach, which project would you chose to invest in?