Ask Question
23 February, 20:26

Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,500 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $4,600 at the end of each of the next 4 years. Each project has a WACC of 11%. What is the equivalent annual annuity of the most profitable project? a. $1,345.50b. $1,346.30c. $1,361.52d. $1,376.74e. $1,411.15

+1
Answers (1)
  1. 23 February, 23:13
    0
    d. $1,376.74

    Explanation:

    NPV of Project X is

    Year Cash outflow/inflow Present value factor Present value

    0 - $10,000.00 1 - $10,000.00

    1 $6,000.00 0.900901 $5,405.41

    2 $8,500.00 0.811622 $6,898.79

    NPV $2,304.20

    NPV of Project Y is

    Year Cash outflow/inflow Present value factor Present value

    0 - $10,000.00 1 - $10,000.00

    1 $4,600.00 0.900901 $4,144.14

    2 $4,600.00 0.811622 $3,733.46

    3 $4,600.00 0.731191 $3,363.48

    4 $4,600.00 0.658731 $3,030.16

    Total $4,271.25

    Formula for calculation of Equivalent annual annuity is given by:

    C = r * (NPV) / (1 - (1+r) - n)

    Applying the formula for project X, NPV = $2304,20

    r = 11%, n = 2

    Substituting the values in the above formula

    C = 11%*$2304,20 / (1 - (1+11%) - 2

    =$1345.38

    Applying the formula for project Y, NPV = $4271.25

    r = 11%, n = 4

    Substituting the values in the above formula

    C = 11%*$4271.25 / (1 - (1+11%) - 4

    = $1376.74

    Therefore, most profitable project is Y and its equivalent annual annuity = $1376.74.
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers