Question: Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and repeatable. Years 0

Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and repeatable.

Years 0 1 2 3 4

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CFL -500 50 100 350 430

CFS -650 400 500

WACC: 15%

Given the two projects are of different length, one suggestion is to use the replacement

chain approach to compare them. If this approach is used, which project will you choose

and why? Show the calculations.

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