Question

6. The equivalent annual annuity approach - Evaluating projects with unequal lives Aa Aa E Evaluating projects with unequal lives Your company is considering starting a new project in either Spain or Mexico-these projects are mutually exclusive, so your boss has asked you to analyze the projects and then tell her which project will create more value for the company's shareholders. The Spanish project is a six-year project that is expected to produce the following cash flows: The Mexican project is only a three-year project; however, your company plans to repeat the project after three years. The Mexican project is expected to produce the following cash flows: Project: Year 0: Year 2: Year 3: Year 4: Year 5: Year 6: Spanish -$975,000 $350,000 $370,000 $390,000 $320,000 $115,000 $80,000 Project: Year 0: Year 1: Year 2: Year 3: Mexican -$530,000 $280,000 $290,000 $310,000 Because the projects have unequal lives, you have decided to use the equivalent annual annuity approach to evaluate them. You have determined that the appropriate cost of capital for both projects is 12%. Calculate the NPV of both projects. NPV Spanish project: NPV Mexican project:

Answer 1

AYSpanih project-95 000 +350000 370 000 + J12 1122 +390000 1123 ,293,151.22 320000 1124 +1S 00080p00 1-126 1125 NPY Mexican Pheiet 530000+ 280000 290000 1.12 1 1.2 2 t 310000 1.:123 582902-68