7. Unequal project lives Consider the case of Fuzzy Button Clothing Company: Fuzzy Button Clothing...
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Accounting
7. Unequal project lives
Consider the case of Fuzzy Button Clothing Company:
Fuzzy Button Clothing Company has to choose between two mutually exclusive projects. If it chooses project A, Fuzzy Button will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects:
Cash Flows
Project A
Project B
Year 0:
$20,000
Year 0:
$40,000
Year 1:
11,000
Year 1:
8,000
Year 2:
17,000
Year 2:
16,000
Year 3:
16,000
Year 3:
15,000
Year 4:
12,000
Year 5:
11,000
Year 6:
10,000
If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project Bassuming that both projects have a weighted average cost of capital of 10%?
$12,566
$15,708
$9,425
$10,210
Fuzzy Button Clothing Company is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $-8,234. Fuzzy Button can replicate this project indefinitely. The equivalent annual annuity (EAA) for this project is ____?.
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