CENGAGE MINDTAP Ch 12- Assignment - Cash Flow Estimation and Risk Analysis 7. Unequal project lives...

Transcribed Image Text:

CENGAGE MINDTAP Ch 12- Assignment - Cash Flow Estimation and Risk Analysis 7. Unequal project lives Wizard Inc. has to choose between two mutually exclusive projects. If it chooses project A, Wizard Inc. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%? Cash Flow Project A Project B Year 0: -$15,000 Year 0: -$40,000 Year 1: 9,000 Year 1: 9,000 Year 2: 15,000 Year 2: 13,000 Year 3: 14,000 Year 3: 12,000 Year 4: 11,000 Year 5: 10,000 Year 6: 9,000 $16,085 $19,302 $21,447 $23,592 $13,941 Wizard Inc. is considering a three-year project that has a weighted average cost of capital of 12% and a NPV of $49,876. Wizard Inc. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? $25,958 $24,919 $18,689 $21,804 O $20,766 CENGAGE MINDTAP Ch 12- Assignment - Cash Flow Estimation and Risk Analysis 7. Unequal project lives Wizard Inc. has to choose between two mutually exclusive projects. If it chooses project A, Wizard Inc. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%? Cash Flow Project A Project B Year 0: -$15,000 Year 0: -$40,000 Year 1: 9,000 Year 1: 9,000 Year 2: 15,000 Year 2: 13,000 Year 3: 14,000 Year 3: 12,000 Year 4: 11,000 Year 5: 10,000 Year 6: 9,000 $16,085 $19,302 $21,447 $23,592 $13,941 Wizard Inc. is considering a three-year project that has a weighted average cost of capital of 12% and a NPV of $49,876. Wizard Inc. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? $25,958 $24,919 $18,689 $21,804 O $20,766