Deck 23: Comparing Two Mutually Exclusive Projects: NPV and Equivalent Annual Annuity Analysis

Question 1

Mulroney Corp.is considering two mutually exclusive projects.Both require an initial investment of $10,000,and their risks are average for the firm.Project X has an expected life of 2 years with after-tax cash inflows of $5,300 and $7,000 at the end of Years 1 and 2,respectively.Project Y has an expected life of 4 years with after-tax cash inflows of $3,500 at the end of each of the next 4 years.The firm's WACC is 7.6%.Use the replacement chain to determine the NPV of the most profitable project.

A) $2,155.12
B) $1,937.80
C) $1,430.71
D) $1,901.58
E) $1,811.03

Answer 1

E

Question 2

Wilson Co.is considering two mutually exclusive projects.Both require an initial investment of $11,000,and their risks are average for the firm.Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,785 at the end of Years 1 and 2,respectively.Project Y has an expected life of 4 years with after-tax cash inflows of $4,750 at the end of each of the next 4 years.The firm's WACC is 9.200%.Determine the equivalent annual annuity of the most profitable project.

A) $1,661.26
B) $1,192.36
C) $1,607.67
D) $1,339.73
E) $1,393.32

Answer 2

D