Seattle Manufacturing is considering the purchase of one of three mutually exclusive projects for improving its assembly line.
The firm plans to use a 14 percent cost of capital to evaluate these equal-risk projects. The initial outlay and the annual cash outflows over the life of each project are shown in the following table
|
Initial Outlay (CF0)
|
Project X
$ 156,000
|
Project Y
$ 104,000
|
Project Z
$ 132,000
|
|
Year (t)
|
|
Cash Outflows (CFt)
|
|
|
1
|
$ 34,000
|
$ 56,000
|
$ 30,000
|
|
2
|
50,000
|
56,000
|
30,000
|
|
3
|
66,000
|
-
|
30,000
|
|
4
|
82,000
|
-
|
30,000
|
|
5
|
-
|
-
|
30,000
|
|
6
|
-
|
-
|
30,000
|
|
7
|
-
|
-
|
30,000
|
a. Calculate the NPV for each project over its life. Rank the projects in descending order based on NPV.
b. Use the equivalent annual cost (EAC) method to evaluate and rank the projects in descending order based on the EAC.
c. Compare and contrast your findings in parts (a) and (b). Which project would you recommend that the firm purchase? Why?