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8.9% Hurdle Rate 20% Tax rate Project 1 Project 2 Project 1 year 3 1 2 4 5 6 0 (11,000) (26,500) Annuity factor: NPV of project: EAA: 9,400 Initial Investment: Equipment Initial Investment: Other Estimated incremental revenues Estimated incremental costs Tax benefit of depreciation** Net Incremental cash Flows PVs of Incremental cash flows 9,200 (600) 9,300 (600) 9,500 (600) 9,600 (600) 9,700 (600) (600) Which Project should be purchased? Annual depreciation: Tax Benefit as positive numbers Project 2 year 3 1 2 4 5 0 (11,400) (28,000) Initial Investment: Equipment Initial Investment: Other Estimated incremental revenues Estimated incremental costs Tax benefit of depreciation** Net Incremental cash Flows PVs of Incremental cash flows 10,800 (525) 11,100 (525) 11,200 (525) 11,300 (525) 11,600 (525) Annual depreciation: Tax Benefit as positive numbers
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