Question: Use the data below for problems BELOW Year Proj Y Proj Z 0 ($210,000) ($210,000) 1 200,000 95,000 2 95,000 78,000 3 98,000 73,000 4
Use the data below for problems BELOW
| Year | Proj Y | Proj Z |
| 0 | ($210,000) | ($210,000) |
| 1 | 200,000 | 95,000 |
| 2 | 95,000 | 78,000 |
| 3 | 98,000 | 73,000 |
| 4 | 87,500 | |
| 5 | 75,000 | |
| 6 | 75,000 |
The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have an 11% cost of capital.
A. What is each projects initial NPV without replication?
B. What is each projects equivalent annual annuity?
C. Now apply the replacement chain approach to determine the shorter projects extended NPV. Which project should be chosen?
D. Now assume that the cost to replicate Project Y in 2 years will increase to $275,000 because of inflationary pressures. How should the analysis be handled now, and which project should be chosen?
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