- Bates Corporation is considering two mutually exclusive projects. The initial outlay and annual cash flows over the life of each project are given in the following table:
|
Year
|
0
|
1
|
2
|
3
|
4
|
|
S
|
-$150,000
|
20,000
|
30,000
|
50,000
|
60,000
|
|
Q
|
-$100,000
|
55,000
|
65,000
|
|
|
Assume the appropriate discount rate for both projects is 11%.
(A) Calculate the NPV for each project over its life. Which project should the company accept based on NPV?
(B) Calculate equivalent annuity for each project. Which project should the company accept based on equivalent annuity?
(C) If NPV in part (A) and equivalent annuity in part (B) choose different projects, which project would you recommend?