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Unequal project lives
Allied Biscuit Co. has to choose between two mutually exclusive projects. If it chooses project A, Allied Biscuit Co. 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 14%?
Cash Flow
Project A
Project B
Year 0:
-$15,000
-$40,000
Year 1:
9,000
Year 2:
15,000
13,000
Year 3:
14,000
12,000
Year 4:
11,000
Year 5:
10,000
Year 6:
$18,237
$17,164
$21,455
$12,873
$19,310
Allied Biscuit Co. is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $45,681. Allied Biscuit Co. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?
$15,614
$22,043
$20,206
$21,124
$18,369
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