Wisconsin Dairy Inc. is deciding on its capital budget forthe upcoming year. Among the projects being considered are two machines, W and WW. Wcosts $500,000 and will produce expected after-tax cash flows of $300,000 during the next2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 duringthe next 4 years. Both projects have a 10% WACC.a. If the projects are independent and not repeatable, which project or projects should thecompany accept?b. If the projects are mutually exclusive but are not repeatable, which project should thecompany accept?c. Assume that the projects are mutually exclusive and can be repeated indefinitely.1. Use the replacement chain method to determine the NPV of the project selected.2. Use the equivalent annual annuity method to determine the annuity of the projectselected.d. Could a replacement chain analysis be modified for use where the project’s cash flowsare different each time it is repeated? Explain.
Wisconsin Dairy Inc. is deciding on its capital budget for
the upcoming year. Among the projects being considered are two machines, W and WW. W
costs $500,000 and will produce expected after-tax cash flows of $300,000 during the next
2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 during
the next 4 years. Both projects have a 10% WACC.
a. If the projects are independent and not repeatable, which project or projects should the
company accept?
b. If the projects are mutually exclusive but are not repeatable, which project should the
company accept?
c. Assume that the projects are mutually exclusive and can be repeated indefinitely.
1. Use the replacement chain method to determine the
2. Use the equivalent annual
selected.
d. Could a replacement chain analysis be modified for use where the project’s cash flows
are different each time it is repeated? Explain.
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