Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Consider two projects, T and F. which are mutually exclusive, have unequal lives, and
are repeatable. Their cash flows are depicted in the table below:
Project Year 0
T
Year 1
F
Year 2
$75 million $45 million $45 million
-$91 million $24 million $24 million $24 million $24 million $24 million
Assuming a WACC of 7.5%, use the equivalent annuity approach (EAA) to compare
the projects and pick the better choice, given repetition.
Year 3
Project F is better as its NPV 5300.805
Project Tis better as its EAA Nighort 55.72
Project F is better as its EAA is higher by $1.72
Project T is better as its EAA is higher by $1,722.411
Year 4
Project F is better as its EAA is higher by $300.805
Year 5
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Transcribed Image Text:Consider two projects, T and F. which are mutually exclusive, have unequal lives, and are repeatable. Their cash flows are depicted in the table below: Project Year 0 T Year 1 F Year 2 $75 million $45 million $45 million -$91 million $24 million $24 million $24 million $24 million $24 million Assuming a WACC of 7.5%, use the equivalent annuity approach (EAA) to compare the projects and pick the better choice, given repetition. Year 3 Project F is better as its NPV 5300.805 Project Tis better as its EAA Nighort 55.72 Project F is better as its EAA is higher by $1.72 Project T is better as its EAA is higher by $1,722.411 Year 4 Project F is better as its EAA is higher by $300.805 Year 5
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