Dorati Inc. is considering two mutually exclusive projects. Dorati used a 15% required rate of return to evaluate capital expenditure projects. If the two projects have the costs and cash flows shown below, using a replacement chain determine the NPV for each.
Assume in two years Project S will still cost $70,000 and produce the same two years of cash flows.
A)NPVs = $8,860: NPVT = $109,240
B)NPVs = $14,690: NPVT = $109,240
C)NPVs = $40,020: NPVT = $109,240
D)None of the above

Question

Dorati Inc. is considering two mutually exclusive projects. Dorati used a 15% required rate of return to evaluate capital expenditure projects. If the two projects have the costs and cash flows shown below, using a replacement chain determine the NPV for each. 
Assume in two years Project S will still cost $70,000 and produce the same two years of cash flows.
A)NPVs = $8,860: NPVT = $109,240 
B)NPVs = $14,690: NPVT = $109,240 
C)NPVs = $40,020: NPVT = $109,240 
D)None of the above

Quizplus · Accepted Answer

Solution:
NPVT = -100,000 + 60,000(.870) + 70,000(.756) + 80,000(.658)
   + 90,000(.572) = $109,240
NPVs = -70,000 - 70,000(.658) + 50,000(.870) + 60,000(.756)
   + 50,000(.658) + 60,000(.572) = 40,000