Suppose a firm is considering two mutually exclusive projects. One project has a life of6 years; the other, a life of 10 years. Both projects can be repeated at the end of their lives.Might the failure to employ a replacement chain or EAA analysis bias the decision towardone of the projects? If so, which one and why?

Suppose a firm is considering two mutually exclusive projects. One project has a life of6 years; the other, a life of 10 years. Both projects can be repeated at the end of their lives.Might the failure to employ a replacement chain or EAA analysis bias the decision towardone of the projects? If so, which one and why?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 4Q

See similar textbooks

Similar questions

a. They payback period of project A is ___ years (round to two decimal places) The payback period of project B is ____ years. (round to two decimal places) According to the payback method, which project should the firm choose? b. The NPV of project A is $___ The NPV of project B is $___ c. The IRR of project A is ___ The IRR of project B is ___ d. Make a reccomendation
Suppose a firm is considering two mutually exclusive projects. One has alife of 6 years and the other a life of 10 years. Would the failure to employsome type of replacement chain analysis bias an NPV analysis against oneof the projects? Explain.
Which of the following statements are correct in the context of Annual Worth Value Calculations? Note: This is a Multiple Answers question so please select all of the options you believe are correct. O If the period of need is greater or equal to the Least Common Multiple (LCM) of the lives of all of the alternatives, then we simply need to compare the Annual Worth (AW) of each alternative over one life cycle to determine the best project. O If each project alternative is allowed to complete its full life, we can assume that the AW for the full life cycle will be exactly the same for each additional full life cycle. O You must use an incremental project justification approach when comparing two or more Mutually Exclusive Projects when using Annual Worth (AW) project values. E The output of an Annual Worth Value Calculation is easy to understand and communicate because it is stated in terms of dollars per vear. The decision criteria used to evaluate a single project using the AW method…
Identify the one true statement. a. Compare investment alternatives over a common planning horizon. b. Investment alternatives with unequal planning horizons cannot be compared. c. When the useful lives are not equal, use 10 years as the common time period. d. When the useful lives are not equal, use infinity as the common time period.
Under what conditions might you find more thanone IRR for a project? How would you decidewhether or not to accept the project? If you werecomparing two mutually exclusive projects, onewith a single IRR of 12% and the other with two different IRRs of 10% and 15%, how should youchoose between the projects?
Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project. Be complete and thorough in your answer.
Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project?
2. Which of the following statements is false? (a) If the payback period is less than the maximum acceptable payback period, accept the project. (b) If the payback period is greater than the maximum acceptable payback period, reject the project. (c) If the payback period is less than the maximum acceptable payback period, reject the project (d) Two of the above. 3. Should Pharms company accept a new project if its maximum payback is 3.5 years and its initial cost is P5,000,000 and it is expected to provide operating cash inflows of P1,800,000 in year 1, P900,000 in year 2, P600,000 in year 3 and P1,800,000 in year 4? (a) Yes. (c) It depends. (b) No. 4. (d) None of the above. 4. What is the NPV for the following project if its cost of capital is 15 percent and its initial cost is P5,000,000 and it is expected to provide operating cash inflows of P1,800,000 in year 1, P900,000 in year 2, P600,000 in year 3 and P1,800,000 in year 4? (a) P1,700,000 (b) P371,764 (c) (P137,053) (d)…
Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is most correct? (Assume the projects are not mutually exclusive.) OA. Both projects have a negative net present value (NPV). OB. Both projects should be accepted because the IRR is greater than the required return. OC. If the required return were less than 12 percent. Project 8 would have a higher IRR than Project A OD. Both projects should be rejected.
Consider two mutually exclusive alternatives and the do-nothing approach. Project X has an initial investment of $175 and annual positive cash flows of $65 for four years. Project Y has an initial investment of $88 and annual positive cash flows of $25 for four years. Determine the following: at what interest rates Project X would be attractive? at what interest rates would Project Y be attractive? at what interest rates would it be best to do nothing.
When two mutually exclusive projects are being compared, explain why the short-term project might be ranged higher under the NVP criterion if the cost of the capital is high, whereas the long-term project might be deemed better if the cost of capital is low. Would changes in the cost of capital ever cause a change in the IRR ranking of two such projects? Why or why not?
What do you know about the mathematical value of the internal rate of return of a project under each of the following conditions? a.The future worth of the project is equal to zero. b. The future worth of the project is less than zero.