Question 1

Mon plc is considering investing in two mutually exclusive projects, P and Q, with the same initial cost of $50,000 and different life spans. Both projects have zero salvage values at the end of their useful lines. The company uses the straight-line method of deprecation. The cost of capital for all projects is 15%. The estimated taxable profits for the two projects are shown below:

Project
	Year 1	Year 2	Year 3	Year 4
P	$45,000	$45,000	$45,000	$45,000
Q	$50,000	$40,000	0	0

The companys effective tax rate is 10 percent.

Required:

a. Explain the use of the replacement approach for the companys two projects. (5 marks)

b. Use the replacement method to find the net present values of the two projects. (15 marks)

c. Critically evaluate the use of the replacement approach for project appraisal. (5 marks)