Problem: The final two mutually exclusive projects that Caledonia is considering involve mutually exclusive pieces of machinery that perform the same task. The two alternatives available provide the following set of after-tax net cash flows:
YEAR EQUIPMENT A EQUIPMENT B
0 -$100,000 -$100,000
1 65,000 32,500
2 65,000 32,500
3 65,000 32,500
4 32,500
5 32,500
6 32,500
7 32,500
8 32,500
9 32,500
Equipment A has an expected life of three years, whereas equipment B has an expected life of nine years. Assume a required rate of return of 14 percent.
a. Calculate each project's payback period.
b. Calculate each project's net present value.
c. Calculate each project's internal rate of return.
d. Are these projects comparable?
e. Compare these projects using replacement chains and EAAs. Which project should be selected? Support your recommendation.