Create a replacement chain for alternative a

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Reference no: EM13928245

The Smith Pie Company is considering two mutually exclusive investments that would increase its capacity to make strawberry tarts. The firm uses a 12 percent cost of capital to evaluate potential investments. The two projects have the following costs and expected cash flow streams:

Year	Alternative A	Alternative B	Year	Alternative A Alternative B
0	-$30,000	-$30,000	5	- $6,500
1	10,500	6,500	6	- 6,500
2	10,500	6,500	7	- 6,500
3	10,500	6,500	8	- 6,500
4	10,500	6,500

a. Using these data, calculate the net present value for Projects A and B.

b. Create a replacement chain for Alternative A. Assume that the cost of replacing A will be $30,000 and that the replacement project will generate cash flows of $10,500 for years 5 through 8. Using these figures, recompute the net present value for Alternative A.

c. Which of the two alternatives should be chosen, A or B? Why?

d. Use the equivalent annual annuity method to solve this problem. How does your answer compare with the one obtained in part b?

Reference no: EM13928245

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