Which of the following best describes the appropriate way to evaluate projects with mutually exclusive and unequal life spans?

a) NPV is the appropriate method because NPV is always the preferred method

b) IRR is the appropriate method because IRR adjusts for the fact that projects are not the same length.

c) The replacement chain is the appropriate method because it equalizes the length of unequal projects.

d) Equivalent annuity is the appropriate method because it corrects for the fact that projects are not of the same length.

e) Both c. and d. TRUE

Use the information below for the next four questions. Norlin Corporation is considering an expansion project to begin next year (Time 0). Norlin's cost of capital is 12%. The initial cost of the project will be $250,000 and is expected to generate the following cash flows over its five-year life:

Year	$
1	40.000 $
2	60.000 $
3	90.000 $
4	90.000 $
5	90.000 $

a) What is the payback period of the expansion project?

b) What is the net present value (NPV) of the expansion project?

c) What is the internal rate of return (IRR) for the expansion project?

d) What is the Profitability Index (PI) for the expansion project?

Answer rating: 100% (QA)

SOLUTIONS The appropriate way to evaluate projects with mutually exclusive and unequal life spans is to use the equivalent annuity method which corrects for the fact that projects are not of the same ... View the full answer