WEB APPENDIX 12E: COMPARING MUTUALLY EXCLUSIVE PROJECTS
WITH UNEQUAL LIVES
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 8%. Use the replacement chain to
determine the
NPV of the most profitable project.
a. $1,603.52
b. $1,687.91
c. $1,772.31
d. $1,860.92
e. $1,953.97
2.
Wilson Co. 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 $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 11%. Determine the equivalent
annual
annuity of the most profitable project.
a. $1,112.99
b. $1,236.66
c. $1,374.06
d. $1,526.74
e. $1,679.41