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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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