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Atlas Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project S has an expected life of 2 years withafter-tax cash inflows of $6,000 and $8,000 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years with after-tax cash inflows of $4,373at the end of each of the next 4 years. Each project has a WACC of 10.75%, and Project S can be repeated with no changes in its cash flows. The controller prefersProject S, but the CFO prefers Project L. How much value will the firm gain or lose if Project L is selected over Project S, i.e., what is the value of NPVL - NPVS?
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Answer #1

Atlas Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project S has an expected life of 2years with after-tax cash inflows of $6,000 and $8,000 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years withafter-tax cash inflows of $4,373 at the end of each of the next 4 years. Each project has a WACC of 10.75%, and Project S can be repeated with nochanges in its cash flows. The controller prefers Project S, but the CFO prefers Project L. How much value will the firm gain or lose if Project L isselected over Project S, i.e., what is the value of NPVL - NPVS?

what is the value of NPVL - NPVS? =$ 1,699.8

o year initial investment of $10,000

1year cash flow-----$6000

2 year cash flow-----$8000

WACC of 10.75%,

NPV= $ 11,939.93- $10,000= $1,939.93

NPV OF PROJECT:WACC of 10.75%,V1=4373V2=4373V3=4373V4=4373= 13,639.73NPV= 13,639.73-10,000=$3,639.73

what is the value of NPVL - NPVS?

=$3,639.73 ----$1,939.93 =$ 1,699.8

answered by: cin
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Answer #2

Atlas Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,000 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years with after-tax cash inflows of $4,373 at the end of each of the next 4 years. Each project has a WACC of 9.25%, and Project S can be repeated with no changes in its cash flows. The controller prefers Project S, but the CFO prefers Project L. How much value will the firm gain or lose if Project L is selected over Project S, i.e., what is the value of NPVL - NPVS?

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