Appendix 12E Mutually Exclusive Projects with Unequal Lives
Answers and Solutions
12E–1
Web Appendix 12E
Comparing Mutually Exclusive Projects with
Unequal Lives
Answers to Questions
12E-1 The analysis discussed in Chapters 11 and 12 of the text treated projects as “one–shot”
occurrences. However, some projects can be repeated over time. Therefore, when choosing
between mutually exclusive projects, we must first determine if they can be repeated, and if so, we
12E-2 The EAA method is often easier to apply than the replacement chain method, but the replacement
chain method is easier to explain to decision makers. Still, the two methods lead to the same
decision if consistent assumptions are used.
12E-3 There are several potentially serious weaknesses inherent in this type of analysis: (1) If inflation is
expected, then replacement equipment will have a higher price. Moreover, both sales prices and
operating costs will probably change. Thus, the static conditions built into the analysis would be
invalid. (2) Replacements that occur down the road will probably employ new technology, which in
12E–2
Answers and Solutions
Appendix 12E Mutually Exclusive Projects with Unequal Lives
Solutions to Problems
12E-1 a. Project A: 0 1 2
| | |
-10,000 6,000 8,000
Using a financial calculator, input the following data: CF0 = –10000, CF1 = 6000, CF2 = 8000,
I/YR = 10, and then solve for NPVA = $2,066.12.
b. To determine the answer to part b, we use the replacement chain (common life) approach to
calculate the extended NPV for Project A. Project B already extends out to 4 years, so its NPV is
$2,679.46.
Project A: 0 1 2 3 4
| | | | |
c. From part a, NPVA = $2,066.12 and NPVB = $2,679.46. Solving for PMT determines the EAA:
12E-2 Machine 190-3:
0 1 2 3
| | | |
-190,000 87,000 87,000 87,000
10%
10%
14%
12%
Appendix 12E Mutually Exclusive Projects with Unequal Lives
Answers and Solutions
12E–3
Machine 360-6:
0 1 2 3 4 5 6
| | | | | | |
-360,000 98,300 98,300 98,300 98,300 98,300 98,300
Using a financial calculator, input the following data: CF0 = –360000; CF1-6 = 98300; I/YR = 14;
and solve for NPV360-6 = $22,256 (for 6 years).
12E-3 Because Plane A’s renewal investment changes, the EAA method cannot be used, so the
replacement chain method must be used.
Plane A: Expected life = 5 years; cost = $100 million; CF = $30 million; WACC = 12%; cost of
renewing Plane A = $105 million.
A: 0 1 2 3 4 5 6 7 8 9 10
12%
14%
10%
12E–4
Answers and Solutions
Appendix 12E Mutually Exclusive Projects with Unequal Lives
12E-4 A: 0 1 2 3 4 5 6 7 8
| | | | | | | | |
–12
-8
-10; CF1-3 = 4; CF4 = -8; CF5-8 = 4.2. Then enter I/YR = 10, and press the NPV key to get
extended NPVA = $3.58 million.
–15 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5
Enter these cash flows into the cash flow register, along with the interest rate, and press the NPV
key to get NPVB = $3.672 $3.67 million.
10%