Anan Corp is evaluating 2 mutually exclusive equipment investments that would increase its production capacity. the company uses 14 percent required rate of return to evaluate capital expenditure projects. the 2 investments have the following costs and expected cash flow streams.
year investment D investment E
0 -50,000 -50,000
1 24,000 15,000
2 24,000 15,000
3 24,000 15,000
4 0 15,000
5 0 15,000
6 0 15,000
Show all steps and calculations.
- Calculate the net present value for investment D and E.
- What is a replacement chain for investment . Assume that the cost of replacing D remains at 50,000 and tat the replacement project will renerate cash inflows of 24,000 for years 4 through 6. Using these figures, recalculate the net present value for investment D.
- Which of the two investments must be chosen? Why?
- Use the equivalent annual annuity method to solve this problem. How does your answer compare with the one obtained in part 2?