Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 in year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%.
Project A: NPV=$5,826, Profitability Index=1.08, Internal Rate of Return= 15.81%
Project B: NPV=$18,097, Profitability Index=1.23, Internal Rate of Return= 20.79%
Question 1) Using the above information, which project would you recommend using the replacement chain method to evaluate the projects with different lives?
a. Project B because its life is longer than Project A.
b. Project A because its replacement chain NPV is $21,652, which exceeds the NPV for Project B.
c. Project A because its replacement chain NPV is $15,642, which exceeds the NPV for Project B.
d. Project B because the replacement chain NPV for Project A is only $10,642.
Question 2) Using the above information, the equivalent annual annuity amount for project A is ________.
a. $2,889
b. $3,357
c. $4,485
d. $5,532
Question 3) Using the above information, the equivalent annual annuity amount for project B is ________.
a. $3,875
b. $4,994
c. $5,709
d. $6,851
If you can, please show the formula for the equivalent annual annuity amount. Thank you in advance.
Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 in year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%.
Project A: NPV=$5,826, Profitability Index=1.08, Internal Rate of Return= 15.81%
Project B: NPV=$18,097, Profitability Index=1.23, Internal Rate of Return= 20.79%
Question 1) Using the above information, which project would you recommend using the replacement chain method to evaluate the projects with different lives?
a. Project B because its life is longer than Project A.
b. Project A because its replacement chain NPV is $21,652, which exceeds the NPV for Project B.
c. Project A because its replacement chain NPV is $15,642, which exceeds the NPV for Project B.
d. Project B because the replacement chain NPV for Project A is only $10,642.
Question 2) Using the above information, the equivalent annual annuity amount for project A is ________.
a. $2,889
b. $3,357
c. $4,485
d. $5,532
Question 3) Using the above information, the equivalent annual annuity amount for project B is ________.
a. $3,875
b. $4,994
c. $5,709
d. $6,851
If you can, please show the formula for the equivalent annual annuity amount. Thank you in advance.
Related questions
The Sloan Corporation is trying to choose between the following two mutually exclusive design projects:
| Year | Cash Flow (I) | Cash Flow (II) | |||||
| 0 | â$ | 55,000 | â$ | 18,900 | |||
| 1 | 25,000 | 10,150 | |||||
| 2 | 25,000 | 10,150 | |||||
| 3 | 25,000 | 10,150 | |||||
| a-1 | If the required return is 10 percent, what is the profitability index for both projects? (Do not round intermediate calculations. Round your answers to 3 decimal places, e.g., 32.161.) |
| Profitability Index | ||
| Project I | ||
| Project II | ||
| a-2 | If the company applies the profitability index decision rule, which project should the firm accept? | ||||
|
| b-1 | What is the NPV for both projects? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| NPV | ||
| Project I | $ | |
| Project II | $ | |
| b-2 | If the company applies the NPV decision rule, which project should it take? | ||||
|
| The Sloan Corporation is trying to choose between the following two mutually exclusive design projects: |
| Year | Cash Flow (I) | Cash Flow (II) | |||||
| 0 | â$ | 56,000 | â$ | 18,800 | |||
| 1 | 26,000 | 10,100 | |||||
| 2 | 26,000 | 10,100 | |||||
| 3 | 26,000 | 10,100 | |||||
| a-1 | If the required return is 12 percent, what is the profitability index for both projects? (Do not round intermediate calculations. Round your answers to 3 decimal places, e.g., 32.161.) |
| Profitability Index | ||
| Project I | ||
| Project II | ||
| a-2 | If the company applies the profitability index decision rule, which project should the firm accept? | ||||
|
| b-1 | What is the NPV for both projects? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| NPV | ||
| Project I | $ | |
| Project II | $ | |
| b-2 | If the company applies the NPV decision rule, which project should it take? | ||||
|
