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Vanderheiden Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process S has a cost of $9,000 and will produce net cash flows of $6,000 per year for 2 years. Process L will cost $14,500 and will produce cash flows of $5,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. If cash inflows occure at the end of each year and if Vanderheiden cost of capital is 12%, which is a better project? By what amount will this better project increase vanderheidens value?

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Financial Management, Finance

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