Praxis Corp. has to choose between two mutually exclusive projects. If it chooses project A, Praxis Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%? Cash Flow Project A Project B Year 0: –$12,500 Year 0: –$45,000 Year 1: 8,000 Year 1: 10,000 Year 2: 14,000 Year 2: 17,000 Year 3: 13,000 Year 3: 16,000 Year 4: 15,000 Year 5: 14,000 Year 6: 13,000 $11,776 $9,421 $7,066 $10,598 $7,654 Praxis Corp. is considering a three-year project that has a weighted average cost of capital of 11% and a NPV of $22,870. Praxis Corp. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? $8,423 $7,955 $11,231 $9,359 $10,295
Praxis Corp. has to choose between two mutually exclusive projects. If it chooses project A, Praxis Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%? Cash Flow Project A Project B Year 0: –$12,500 Year 0: –$45,000 Year 1: 8,000 Year 1: 10,000 Year 2: 14,000 Year 2: 17,000 Year 3: 13,000 Year 3: 16,000 Year 4: 15,000 Year 5: 14,000 Year 6: 13,000 $11,776 $9,421 $7,066 $10,598 $7,654 Praxis Corp. is considering a three-year project that has a weighted average cost of capital of 11% and a NPV of $22,870. Praxis Corp. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? $8,423 $7,955 $11,231 $9,359 $10,295
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Praxis Corp. has to choose between two mutually exclusive projects. If it chooses project A, Praxis Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%?
|
|
Cash Flow
|
|
|
|---|---|---|---|
| Project A | Project B | ||
| Year 0: | –$12,500 | Year 0: | –$45,000 |
| Year 1: | 8,000 | Year 1: | 10,000 |
| Year 2: | 14,000 | Year 2: | 17,000 |
| Year 3: | 13,000 | Year 3: | 16,000 |
| Year 4: | 15,000 | ||
| Year 5: | 14,000 | ||
| Year 6: | 13,000 |
$11,776
$9,421
$7,066
$10,598
$7,654
Praxis Corp. is considering a three-year project that has a weighted average cost of capital of 11% and a NPV of $22,870. Praxis Corp. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?
$8,423
$7,955
$11,231
$9,359
$10,295
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