You are evaluating two projects.You may accept only one of them.Project one will cost $379,000 initially and will pay $134,000 each year for the next 5 years.Project two will cost $454,000 initially,but will pay $101,000 for the next 10 years.The firm's cost of capital is 15%.Use the replacement chain approach to compute the NPV of each project.Which project has the highest NPV and by how much? Round your answers to the nearest dollar.

Question

Quizplus · Accepted Answer

First compute the NPV of accepting Project 1 twice: NPV of Project 1 = -C₀ + $CF × 11ea7fdb_fc8b_8a81_a768_6317b24fcab3_TB2902_11 - C₀/ 11ea7fdb_fc8b_8a82_a768_1b3d83469dc6_TB2902_11 NPV = -379,000 × (1 + 1/ 11ea7fdb_fc8b_8a83_a768_ebd3549147c6_TB2902_11 ) - (-134,000) × 5.01877 NPV = -379,000 × (1.49717667) + 672,515 NPV = $105,085 NPV of Project 2 = -C₀ + $CF × 11ea7fdb_fc8b_8a84_a768_651d9f47dc23_TB2902_11 NPV of Project 2 = -454,000 + 101,000 × 5.01877 NPV of Project 2 = $52,896 So Project 1 has a higher NPV by $52,189

You Are Evaluating Two Projects