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4. Unequal project lives ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom 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 12%? Cash Flow Project A Year 0: -$17,500 Year 0: $45,000 Year 1: 10,000 Year 1: 9,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 14,000 Year 5: 13,000 Year 6: 12,000 • $14,124 $14,955 $18,279 ● $16,617 • $13,294 ABC Telecom is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $45,681. ABC Telecom can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? • $22,043 • $20,206 $21,124 • $22,961 ● $18,369

4. Unequal project lives ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom 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 12%? Cash Flow Project A Year 0: -$17,500 Year 0: $45,000 Year 1: 10,000 Year 1: 9,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 14,000 Year 5: 13,000 Year 6: 12,000 • $14,124 $14,955 $18,279 ● $16,617 • $13,294 ABC Telecom is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $45,681. ABC Telecom can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? • $22,043 • $20,206 $21,124 • $22,961 ● $18,369

Essentials Of Investments
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
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4. Unequal project lives ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom 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 12%? Cash Flow Project A Year 0: -$17,500 Year 0: $45,000 Year 1: 10,000 Year 1: 9,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 14,000 Year 5: 13,000 Year 6: 12,000 • $14,124 $14,955 $18,279 ● $16,617 • $13,294 ABC Telecom is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $45,681. ABC Telecom can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? • $22,043 • $20,206 $21,124 • $22,961 ● $18,369
Transcribed Image Text:4. Unequal project lives ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom 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 12%? Cash Flow Project A Year 0: -$17,500 Year 0: $45,000 Year 1: 10,000 Year 1: 9,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 14,000 Year 5: 13,000 Year 6: 12,000 • $14,124 $14,955 $18,279 ● $16,617 • $13,294 ABC Telecom is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $45,681. ABC Telecom can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? • $22,043 • $20,206 $21,124 • $22,961 ● $18,369
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