Question

Question :1 (40%, 8% per sub question)
A firm is evaluating two mutually exclusive projects that have unequal lives. The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select. The firm's cost of capital has been determined to be 14 percent, and the projects have the following initial investments and cash flows:

1. The NPVs of Projects R and S are

2. The annualized NPV of Project R is

3. The annualized NPV of Project S is

4. Which project should be chosen on the basis of the normal NPV approach?

5. Which project should be chosen using the Annualized NPV approach?

PROJECT R PROJECT S

INITIAL INVESTMENT 40,000 58,000

CASH FLOW. 1. 20,000 30,000

2. 20,000 55,000

3. 20,000

4. 20,000

PLEASE SHOW WORK FOR EACH QUESTION THANKS!!

Answer 1

1. The NPVs of Projects R and S are 18274.25 and 10636.50

2. The annualized NPV of Project R is 6271.81

3. The annualized NPV of Project S is 6459.44

4. Which project should be chosen on the basis of the normal NPV approach? Project R (Higher NPV)

5. Which project should be chosen using the Annualized NPV approach? Project S (Higher NPV)

Year	R	S
0	-40000	-58000
1	20000	30000
2	20000	55000
3	20000
4	20000
NPV	18274.25	10636.50
Annualized NPV	$6,271.81	$6,459.44