Considering two mutually exclusive investments

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Reference no: EM13925227

The Smith Pie Company is considering two mutually exclusive investments that would increase its capacity to make strawberry tarts. The firm uses a 12 percent cost of capital to evaluate potential investments. The two projects have the following costs and cash flows streams: Alternative A Year 0 $-30,000 1 $10,500 2 $10,500 3 $10,500 4 $10,500 Alternative B Year 0 $-30,000 1 $6,500 2 $6,500 3 $6,500 4 $6,500 5 $6,500 6 $6,500 7 $6,500 8 $6,500 a. Using the data, calculate the net present value for Projects A and B. b. Create a replacement chain for Alternative A. Assume that the cost of replacing A will be $30,000 and that the replacement project will generate cash flows of $10,500 for years 5 through 8. Using these figures, recomputed the net present value of Alternative A. c. Which of the two alternatives should be chosen, A or B? Why?

Reference no: EM13925227

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