Carlyle Inc. is considering two mutually exclusive projects. Both require an ini
ID: 2699723 • Letter: C
Question
Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $15,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $7,000 and $12,000 at the end of Years 1 and 2, respectively. In addition, Project S can be repeated at the end of Year 2 with no changes in its cash flows. Project L has an expected life of 4 years with after-tax cash inflows of $5,200 at the end of each of the next 4 years. Each project has a WACC of 9.00%. What is the equivalent annual annuity of the most profitable project? Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $15,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $7,000 and $12,000 at the end of Years 1 and 2, respectively. In addition, Project S can be repeated at the end of Year 2 with no changes in its cash flows. Project L has an expected life of 4 years with after-tax cash inflows of $5,200 at the end of each of the next 4 years. Each project has a WACC of 9.00%. What is the equivalent annual annuity of the most profitable project?Explanation / Answer
NPV of project S = 7000/1.09 + 12000/1.09^2 -15000 = $1522.18
NPV of project L = 5200 PVIFA(9%,4) - 15000 = $1846.54
Equivalent Anuual benefiet :
Project S = 1522.18/PVIFA(9%,2) = $865.31
Project L = 1846.54/PVIFA(9%,4) = $569.97
Project S is more profitable tthan project L as per equivalent annual annuity or benefiet, it will be better to choose project S