Question: Praxis Corp. is considering two exclusive projects. If it selects Project Alpha, Praxis can reinvest in a similar project in 4 years. Selecting Project Beta
Praxis Corp. is considering two exclusive projects. If it selects Project Alpha, Praxis can reinvest in a similar project in 4 years. Selecting Project Beta means it cannot reinvest. The cash flows for the projects are listed below. Using the replacement chain method, calculate the difference in NPV between Project Alpha and Project Beta, assuming a WACC of 10%.
Cash Flow | Project Alpha | Project Beta |
Year 0 | -$15,000 | -$50,000 |
Year 1 | $10,000 | $10,000 |
Year 2 | $20,000 | $15,000 |
Year 3 | $15,000 | $12,000 |
Year 4 | $10,000 | |
Year 5 | $8,000 | |
Year 6 | $6,000 |
- Calculate the NPV for both projects.
- Determine the equivalent annual annuity (EAA) for each project.
- Find the replacement chain NPV for Project Alpha.
- Compare the NPVs and determine which project should be chosen based on NPV.
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